**UNITED
      STATES** **SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**




x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




For
      the
      fiscal year ended December 31, 2006





o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




For
      the
      transition period from __________ to __________





**Commission
      file number** **0-17771**





**FRANKLIN
      CREDIT MANAGEMENT CORPORATION**





**Delaware**
            
            **75-2243266**(State
                of incorporation)
            
            IRS
                Employer Identification No.





**101
      Hudson Street**


**Jersey
      City, New Jersey 07302**


**(201)
      604-1800**





Securities
      registered pursuant to Section 12(b) of the Act: None





Securities
      registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value
      per share.




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.


Yes
o  No x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.


Yes
oNox




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12
      months (or for such shorter period that the registrant was required to file
      such
      reports), and (2) has been subject to such filing requirements for the past
      90
      days. Yes x  No
o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained in herein, and will not be contained, to the
      best of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
      Act.




oLarge
      accelerated
      filer   o Accelerated
      filer   xNon-accelerated
      filer




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
oNox




Based
      upon the closing sale price on the last business day of the registrant’s most
      recently completed second fiscal quarter ($7.77 on June 30, 2006), the aggregate
      market value of common stock held by non-affiliates of the registrant as of
      such
      date was approximately $30,723,015. There is no non-voting stock
      outstanding.




Number
      of
      shares of the registrant’s common stock, par value $0.01 per share, outstanding
      as of March 23, 2007: 8,025,295





DOCUMENTS
      INCORPORATED BY REFERENCE




Portions
      of the registrant’s definitive proxy statement, which will be filed within 120
      days of December 31, 2006, are incorporated by reference into Part
      III.














**FRANKLIN
      CREDIT MANAGEMENT CORPORATION**




**FORM
      10-K**


**December
      31, 2006**





**INDEX**


**Page****PART
                  I**Item
                  1.
              
              Business
              
              3Item
                  1A.
              
              Risk
                  Factors
              
              32Item
                  1B.
              
              Unresolved
                  Staff Comments
              
              48Item
                  2.
              
              Properties
              
              48Item
                  3.
              
              Legal
                  Proceedings
              
              49Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              49**PART
                  II**Item
                  5.
              
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and
                  IssuerPurchases
                  of Equity Securities
              
              50Item
                  6.
              
              Selected
                  Financial Data
              
              51Item
                  7.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              53Item
                  7A.
              
              Quantitative
                  and Qualitative Disclosure About Market Risk
              
              70Item
                  8.
              
              Financial
                  Statements and Supplementary Data
              
              71Item
                  9.
              
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              
              71Item
                  9A.
              
              Controls
                  and Procedures
              
              72Item
                  9B.
              
              Other
                  Information
              
              72**PART
                  III**Item
                  10.
              
              Directors
                  and Executive Officers of the Registrant
              
              73Item
                  11.
              
              Executive
                  Compensation
              
              73Item
                  12.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and
                  RelatedStockholder
                  Matters
              
              73Item
                  13.
              
              Certain
                  Relationships and Related Transactions
              
              73Item
                  14.
              
              Principal
                  Accountant Fees and Services
              
              73**PART
                  IV**Item
                  15.
              
              Exhibits
                  and Financial Statement Schedules
              
              74
  2


**PART
      I**




**ITEM
      1.****BUSINESS**




**Overview**




We
      are a
      specialty consumer finance company primarily engaged in two related lines of
      business: (1) the acquisition, servicing and resolution of performing,
      reperforming and nonperforming residential mortgage loans and real estate
      assets; and (2) the origination of subprime mortgage loans, both for our
      portfolio and for sale into the secondary market. We specialize in acquiring
      and
      originating loans secured by 1-4 family residential real estate that generally
      fall outside the underwriting standards of Fannie Mae and Freddie Mac and
      involve elevated credit risk as a result of the nature or absence of income
      documentation, limited credit histories, higher levels of consumer debt or
      past
      credit difficulties. We typically purchase loan portfolios at a discount, and
      originate loans with interest rates and fees, calculated to provide us with
      a
      rate of return adjusted to reflect the elevated credit risk inherent in the
      types of loans we acquire and originate. Unlike many of our competitors, we
      generally hold for investment the loans we acquire and a significant portion
      of
      the loans we originate.




From
      inception through December 31, 2006, we had purchased and originated in excess
      of $3.91 billion in mortgage loans. As of December 31, 2006, we had total
      assets of $1.67 billion, our portfolios of notes receivable and loans held
      for investment and sale totaled $1.54 billion, and our stockholders’ equity
      was $47.6 million. For the year ended December 31, 2006, we reported a net
      loss of $1.8 million. For the year ended December 31, 2005, we reported net
      income of $7.9 million.




***Loan
      Acquisitions***




Since
      commencing operations in 1990, we have become a nationally recognized buyer
      of
      portfolios of residential mortgage loans and real estate assets from a variety
      of financial institutions in the United States, including mortgage banks,
      commercial banks and thrifts, other traditional financial institutions and
      other
      specialty finance companies. These portfolios generally consist of one or more
      of the following types of mortgage loans:




·
            *performing
                loans*-
                loans to borrowers who are contractually current, but may have been
                delinquent in the past and which may have deficiencies relating to
                credit
                history, loan-to-value ratios, income ratios or
                documentation;





·
            *reperforming
                loans*-
                loans to borrowers who are not contractually current, but have recently
                made regular payments and where there is a good possibility the loans
                will
                be repaid in full; and





·
            *nonperforming
                loans*-
                loans to borrowers who are delinquent, not expected to cure, and
                for which
                a primary avenue of recovery is through the sale of the property
                securing
                the loan.





We
      sometimes refer collectively to these types of loans as “scratch and dent” or
“S&D” loans.




We
      have
      developed a specialized expertise at risk-based pricing, credit evaluation
      and
      loan servicing that allows us to effectively evaluate and manage the higher
      risks associated with this segment of the residential mortgage industry,
      including the rehabilitation or resolution of reperforming and nonperforming
      loans.




We
      refer
      to the S&D loans we acquire as “notes receivable.” In 2006, we purchased
      notes receivable with an aggregate unpaid principal balance of $621 million
      at an aggregate purchase price equal to 92% of the face amount of the
      notes.




3




***Loan
      Originations***




We
      conduct our loan origination business through our wholly owned subsidiary,
      Tribeca Lending Corp., (“Tribeca”), which we formed in 1997 in order to
      capitalize on our experience in evaluating and servicing scratch and dent
      residential mortgage loans. We originate primarily subprime residential mortgage
      loans to individuals with serious financial difficulties and whose
      documentation, credit histories, income and other factors cause them to be
      classified as subprime borrowers and to whom, as a result, conventional mortgage
      lenders often will not make loans. The loans we originate typically carry
      interest rates that are significantly higher than those of prime loans and
      we
      believe have fairly conservative loan-to-value ratios. The principal factor
      in
      our underwriting guidelines has historically been our determination of the
      borrower’s equity in his or her home and the related calculation of the
      loan-to-value ratio based on the appraised value of the property, and not,
      or to
      a lesser extent, on a determination of the borrower’s ability to repay the loan.
      In 2005, we began in an increasing number of cases to gather and analyze
      additional information that allows us to assess to a reasonable degree the
      borrower’s ability and intent to repay the loan in connection with our credit
      decision. We have chosen to focus our marketing efforts on this segment of
      the
      1-4 family residential real estate mortgage market in order to capitalize on
      our
      extensive experience in acquiring and servicing loans with similar credit risk
      characteristics.




In
      2006,
      we originated $384.7 million in subprime mortgage loans, 93% of which were
      adjustable-rate (fixed-rate for the first two years) loans. We originated
      approximately 36% of our mortgage loans on a retail basis, compared with 47%
      in
      2005, and the remainder through our wholesale network of mortgage brokers.
      We
      hold the majority of mortgages we originate in our portfolio and sell the
      remainder for cash in the whole-loan market, depending on market conditions
      and
      our own portfolio goals.




***Loan
      Servicing***




We
      have
      invested heavily to create a loan servicing capability that is focused on
      collections, loss mitigation and default management. In general, we seek to
      ensure that the loans we acquire and originate are repaid in accordance with
      the
      original terms or according to amended repayment terms negotiated with the
      borrowers. Because we expect our loans will experience above average
      delinquencies, erratic payment patterns and defaults, our servicing operation
      is
      focused on maintaining close contact with our borrowers and as a result is
      more
      labor-intensive than traditional mortgage servicing operations. Through frequent
      communication we are able to encourage positive payment performance, quickly
      identify those borrowers who are likely to move into seriously delinquent status
      and promptly apply appropriate loss mitigation strategies. Our servicing staff
      employs a variety of collection strategies that we have developed to
      successfully manage serious delinquencies, bankruptcy and foreclosure.
      Additionally, we maintain a real estate department with extensive experience
      in
      property evaluation, management and the sale of residential
      properties.




**Financing**




We
      have
      historically financed both our acquisitions of mortgage loan portfolios and
      our
      loan originations through various long and short-term borrowing arrangements
      with Sky Bank, the banking affiliate of Sky Financial Group, Inc., an
      $18 billion regional publicly-held bank holding company headquartered in
      Bowling Green, Ohio, and its predecessors (collectively referred to as “Sky”).
      We have had a strong relationship with Sky since the early 1990s. In December
      2006, Sky and Huntington Bancshares Inc. announced a pending merger, expected
      to
      close in the third quarter of 2007, pending regulatory and shareholder
      approvals. The combined bank, which will be the successor to our credit
      facilities provided by Sky, will have approximately $54 billion in assets and
      will be the 24 th largest
      bank holding company headquartered in the United States.




4




In
      October 2004, we consolidated all of our arrangements with Sky relating to
      the
      term funding of loan acquisitions under a Master Credit and Security Agreement
      (referred to as “Master Credit facility”). Under this Master Credit Facility,
      which has been extended to April 30, 2007, we request loans to finance the
      purchase of pools of residential mortgage loans or refinance existing
      outstanding loans. In connection with our continued business expansion, Sky
      has
      arranged for three additional financial institutions to participate under our
      master credit facility. In August 2006, we entered into a $40 million revolving
      warehouse agreement (referred to as “Flow Warehouse”) with Sky and a participant
      to accumulate loans acquired on a flow basis prior to aggregating such loans
      into term debt under the Master Credit Facility. Prior to August 2006, loan
      acquisitions acquired on a flow basis were funded directly under the Master
      Credit Facility. Our borrowings under the Flow Warehouse and Master Credit
      Facility are secured by a first priority lien on the mortgage loans financed
      by
      the proceeds of our borrowings.




To
      finance the loans it originates, in October 2005, Tribeca entered into a
      Warehousing Credit and Security Agreement (referred to as Tribeca Warehouse
      Facility” or “Tribeca Warehousing Agreement”) with Sky and a participant in
      order to accumulate loans originated prior to aggregating such loans into term
      debt under a separate master credit and security agreement with Sky. This
      warehousing agreement is a revolving commitment for $60 million. The maturity
      date of this warehouse commitment was extended to April 30, 2007. In the first
      quarter of 2006, Tribeca and certain of its subsidiaries entered into a Master
      Credit and Security Agreement (referred to as “Tribeca Master Credit Facility”)
      with Sky pursuant to which Tribeca may borrow term funds to finance originated
      loans temporarily financed under its Warehouse Facility. In the first quarter
      of
      2006, Tribeca also entered into a $100 million Master Credit and Security
      Agreement with BOS (USA) Inc., an affiliate of the Bank of Scotland; $98 million
      under this facility was used to consolidate and refinance term loans previously
      made to Tribeca by Sky.




As
      our
      business continues to grow, we continue to seek additional sources of external
      financing, which could include traditional direct lenders, the direct issuance
      of debt instruments and/or the securitization of certain acquired or originated
      loans in our portfolio or newly acquired or originated loans.




**Corporate
      History**




We
      were
      formed in 1990 by, among others, Thomas J. Axon, our Chairman and President,
      and
      Frank B. Evans, Jr., one of our directors, for the purpose of acquiring consumer
      loan portfolios from the Resolution Trust Company, or RTC, and the Federal
      Deposit Insurance Corporation, or FDIC. We became a public company in December
      1994, when we merged with Miramar Resources, Inc., a publicly traded oil and
      gas
      company that had emerged from bankruptcy proceedings in December 1993. The
      newly
      formed entity was renamed Franklin Credit Management Corporation. At the time
      of
      the merger, we divested substantially all of the remaining oil and gas assets
      directly owned by Miramar in order to focus primarily on the non-conforming
      sector of the residential mortgage industry. At that time, we decided to
      capitalize on our experience and expertise in acquiring and servicing loans
      from
      RTC and the FDIC and began purchasing performing, reperforming and nonperforming
      residential mortgage loans from additional financial institutions. In 1997,
      we
      formed Tribeca to originate subprime residential mortgage loans.




**Loan
      Acquisitions - Franklin**




Most
      financial institutions generally sell or securitize the majority of the loans
      they originate in the secondary market. The vast majority of these loans are
      sold at a premium to the face value of the loan, creating a profit for the
      originator/seller. For a variety of reasons, however, a portion of their loan
      production either cannot be sold as intended or must be repurchased for any
      number of reasons including borrower credit, loan-to-value ratios,
      delinquencies, documentation deficiencies or changing demands by investors.
      Such
      loans typically must be sold at a discount to the face value of the note. Our
      acquisition business is focused on purchasing these S&D loans for which a
      highly liquid secondary market generally does not exist. We have a variety
      of
      opportunities to purchase S&D loans, both shortly following origination and
      throughout the remainder of their lifecycle.




5




***Newly
      originated loans*** **.** When a
      financial institution cannot sell a newly-originated mortgage loan through
      normal secondary market channels, it may sell that mortgage at a discounted
      price in order to free up cash or financing capacity. Newly originated loans
      may
      be sold multiple times before they are purchased by a long-term investor. A
      typical scenario is that a loan is originated by a local mortgage banker, sold
      to an intermediary mortgage banker, and finally either sold to a long-term
      investor or securitized. At any point in this process, we may have an
      opportunity to purchase the loan for various reasons, including:




·
                Investor
                    Fallout. Mortgages may not meet the requirements of the secondary
                    market for a number of different reasons, including noncompliance
                    with
                    purchaser program requirements, documentation deficiencies and
                    collateral
                    valuation variances.·
                Loan
                    Repurchases. Once a mortgage is sold, it may be subject to a required
                    repurchase by the seller for a number of different reasons, including
                    a
                    subsequent default by the borrower that occurs within a specified
                    period
                    of time after the sale.·
                Facilitation.
                    Occasionally, financial institutions will originate loans (frequently
                    second liens) even though a liquid secondary market does not
                    exist for
                    those loans in order to facilitate the origination of mortgages
                    that do
                    have a liquid secondary
                    market.




***Seasoned
      loans*** **.** Seasoned
      loans may be sold in the secondary market for a number of reasons,
      including:


·
              Mergers
                  and Acquisitions.
                  The acquirer in a merger or acquisition may find that it has acquired
                  mortgages that do not fit within its credit parameters.·
              Credit
                  or Performance Issues.
                  A
                  portfolio holder of mortgages may have accumulated mortgages that
                  have
                  credit or performance characteristics that do not meet its current
                  needs.·
              Securitization
                  Terminations.
                  When mortgage loans are securitized, the securitization trust normally
                  sells bonds with maturities that are shorter than the life of some
                  of the
                  mortgage loans that act as collateral. Optional call provisions
                  may also
                  provide certain interested parties with the ability to collapse
                  the trust
                  by selling or refinancing the remaining mortgage loans in the trust
                  prior
                  to maturity.·
              Insolvency.
                  When a financial institution becomes insolvent, a trustee may decide
                  to
                  liquidate a mortgage portfolio in order to satisfy the creditors
                  of the
                  insolvent institution.




It
      is
      often more efficient and economical (and sometimes imperative) for lenders
      in
      the situations described above to sell S&D loans at a discount to a
      third-party than to expend the resources necessary to rehabilitate these loans
      internally, as these lenders generally do not possess the financial capability,
      desire or specialized skills and infrastructure necessary to effectively value
      or service these types of assets. In contrast, we have developed specialized
      expertise and an economically-scaled organization that permits us to effectively
      evaluate, bid, finance and service portfolios of these loans.




Since
      commencing operations, we have purchased in excess of $2.92 billion in S&D
      loans, comprised of approximately 74,000 loans, primarily from financial
      institutions. During 2006, we purchased over $621 million of principally S&D
      loans at a weighted average price of 92%, compared with approximately $506
      million during 2005 at a weighted average price of 93% and $652 million during
      2004 at a weighted average price of 87%. In both 2005 and 2006, the loans we
      purchased consisted principally of second-lien mortgages on 1-4 family
      residential properties.




6




Our
      acquisition department seeks out and identifies opportunities to purchase
      portfolios of S&D loans, performs due diligence on the loans included in a
      portfolio, prepares a bid for the portfolio in accordance with our price and
      yield guidelines based on the results of its due diligence investigation and
      assists in the integration of the loans that we ultimately acquire into our
      existing portfolio.




***“Bulk”
      and “Flow” Acquisitions***




Some
      lenders sell their S&D loans in the secondary market in small amounts on a
      frequent basis, while other institutions tend to accumulate larger pools of
      mortgages before selling them. We have established an acquisition group to
      focus
      on each of these two segments of the selling market. Our bulk purchase unit
      historically has been responsible for acquisitions of portfolios with a face
      value of notes receivable in excess of $1.5 million, while our flow unit
      historically has been responsible for acquisitions of portfolios or individual
      notes with a face value of up to $1.5 million. These amounts were recently
      increased to $2.0 million. We make the majority of our bulk pool purchases
      of
      S&D loans from large conventional lenders in connection with the various
      opportunities described above. In contrast, our flow purchases are generally
      made on a more regular basis from smaller, regional mortgage banks that have
      a
      need to quickly dispose of one or more S&D loans. Bulk purchases constituted
      84% of our overall purchases in 2006, 79% in 2005 and 84% in 2004,
      respectively.




***Due
      Diligence***




We
      have
      established a due diligence review process over our years of experience with
      sellers of S&D loans that we use for all prospective purchases. In
      connection with our purchases of bulk portfolios, the due diligence process
      includes an analysis of a majority of the loans in a prospective portfolio,
      except in the case of very large portfolios where, due to time constraints,
      we
      analyze a representative sample of assets in the portfolio. Our team evaluates,
      among other things, lien position, the value of collateral and the borrower’s
      debt-to-income ratio, creditworthiness, employment stability, number of years
      of
      home ownership, FICO scores and mortgage payment history. Where appropriate,
      our
      acquisition department performs an on-site evaluation of the seller’s loan
      servicing department in addition to reviewing the loan files that comprise
      the
      portfolio. This process provides us with additional information as to the actual
      quality of the servicing of the loans in the portfolio, which we believe is
      critical to our ability to properly evaluate the portfolio. In the case of
      flow
      purchases, we typically perform due diligence at our office on each loan we
      acquire, which focuses on the same matters described above. In all cases, we
      tailor our review as appropriate based on the level of our prior experience
      with
      the seller and other factors relevant to the specific portfolio.




***Pricing***




For
      both
      our bulk and flow purchases, we compare the information derived from our due
      diligence review to our historical statistical database and, coupled with our
      cumulative knowledge of the non-conforming segment of the mortgage industry,
      our
      acquisition department projects a collection strategy and estimates the
      collectibility, cost to service and timing of cash flows with respect to the
      loans in the portfolio. Using this information, the acquisition department
      prepares a bid based upon pricing and yield guidelines that reflect the returns
      on assets we are then seeking on purchased assets.




We
      have
      accumulated proprietary databases, models and statistical data, over our years
      of experience with borrowers of S&D loans, based on our understanding of the
      entire credit cycle and our ability to resolve loans. We believe our
      intellectual property provides us with a competitive advantage in analyzing,
      pricing and bidding on S&D loans.




7




***Competition***




We
      face
      increasingly intense competition in the market for the acquisition of S&D
      loans. Many of our competitors have financial resources, acquisition departments
      and servicing capacity considerably larger than our own. Among our largest
      competitors are Residential Funding Corporation, Bayview Financial Trading
      Group, Countrywide Financial Corporation, The Goldman Sachs Group, Lehman
      Brothers, Bear Stearns & Co., Inc. and C-Bass. Competition for acquisitions
      is generally based on price, reputation of the purchaser, funding capacity
      and
      ability to execute within timing parameters required by the seller.




***Borrowers***




Our
      business model focuses for the most part on holding the mortgage assets that
      we
      acquire through resolution. Our borrowers represent a broad and diverse group
      of
      individuals and no single borrower represents a significant portion of our
      S&D loans. Our borrowers from loans acquired are located in all 50
      states.




***Sellers***




We
      acquire S&D loans through a variety of methods, including negotiated sales,
      ongoing purchase agreements, joint-bids with other institutions and private
      and
      public auctions. The supply of assets available for purchase by us is influenced
      by a number of factors, including knowledge by the seller of our interest in
      purchasing assets of the type it is seeking to sell, the general economic
      climate, financial industry regulation and new residential mortgage loan
      origination volume. During 2006, we purchased an aggregate of 425 portfolios
      from 204 sellers, compared with an aggregate of 402 portfolios from 160 sellers
      in 2005. Our sources of bulk loan acquisitions have historically varied from
      year to year and we expect that this will continue to be the case. In addition
      to acquiring loans directly from sellers, we also occasionally acquire loans
      indirectly through brokers.




***Marketing***




Members
      of the sales and marketing group of our acquisitions department continually
      seek
      to identify new opportunities for the purchase of bulk and flow mortgage assets.
      They focus on deepening relationships with sellers from whom we have made
      acquisitions in the past and on developing relationships with new sellers,
      as
      well as with brokers who have access to sellers of the types of portfolios
      that
      we are interested in purchasing.




**Loan
      Originations - Tribeca**




We
      formed
      Tribeca, our wholly-owned subsidiary, in 1997 as an origination platform for
      subprime residential mortgages. Tribeca’s mortgage origination platform provides
      us with an additional vehicle for growth and reduces our reliance on loan
      acquisitions from other financial institutions for growth. Since commencing
      operations in 1997, Tribeca has originated approximately $1.25 billion in
      subprime residential mortgage loans for individuals in serious financial
      difficulties and with credit histories, income and/or other factors that cause
      them to be classified as subprime borrowers.




Through
        Tribeca, we originate principally first mortgage loans. While our current
        strategy is to hold a majority of originated loans in our portfolio for
        investment, our strategy has changed in the past and may do so in the future
        based on market conditions and our own portfolio needs. During the third
        quarter
        of 2006, we began to sell a portion of our newly originated loans for cash
        on a
        whole-loan, servicing-released basis. We focus on developing and offering
        an
        array of proprietary niche products, including innovative purchase and refinance
        loans for 1-4 family residential real estate. We offer both fixed and adjustable
        rate mortgages. Our maximum loan amount is $2 million, and our maximum
        loan-to-value ratio is 75% for portfolio loans (100% for loans underwritten
        to
        specific investor guidelines), depending on the specific product and that
        product’s underwriting requirements. In 2006, our average loan amount was
        $227,000, compared with an average loan amount of $228,000 in 2005 and $173,000
        in 2004. For loans originated in 2006, the weighted average loan-to-value
        ratio
        was 65%, compared with weighted average loan-to-value ratios of 67% and 69%
        for
        2005 and 2004, respectively.


8




***Wholesale
      and Retail Originations***




Tribeca
      originates loans through both wholesale and retail channels. In 2006,
      approximately 36% of loans was originated through our retail channels, with
      the
      remainder originated through a wholesale network of mortgage brokers. Of retail
      loans originated in 2006, approximately 78% was Liberty Loans, which we
      generally hold for our portfolio, while the balance represented loans that
      we
      originated for sale to investors. Principally all of the wholesale loans we
      originated in 2006 were Liberty Loans.




The
      focus
      of our retail operation is direct-to-consumer loans. Our marketing efforts
      consist primarily of pursuing internet-generated leads and to a lesser extent,
      referral-based business from attorneys, accountants, real estate agents and
      financial planners, as well as the retention of existing Franklin Credit
      Management Corporation borrowers. The focus of our wholesale account executives
      is on identifying qualified mortgage brokers and generating a consistent flow
      of
      business. Tribeca maintains five offices, located in New York, New Jersey and
      Pennsylvania, but originates loans in 34 states.




Tribeca
      seeks to minimize the inherent risk of using mortgage brokers to source a
      significant portion of its Liberty Loan originations through a mortgage broker
      review and approval process. Only approved mortgage brokers can submit mortgage
      loan request packages to Tribeca for processing and underwriting. Tribeca
      considers a number of factors for broker approval, including requiring
      experience in sourcing subprime mortgage loans, appropriate state licenses,
      and
      errors/omissions and fidelity insurance polices in force. Tribeca also reviews
      broker tax returns, credit reports, and the broker’s history of lending
      experience and consumer complaints.




A
      complete mortgage loan request package includes in many cases a completed
      borrower application in accordance with our particular program guidelines,
      credit report, appraisal and other required documentation supporting the
      application. Appraisals are only accepted from Tribeca-approved appraisers,
      and
      appraised values generally are compared with various other sources of property
      value estimates or opinions. When a mortgage loan request package is received
      from an approved broker, Tribeca personnel review the package for all required
      documents and information. If the package is complete, Tribeca personnel
      underwrite the loan in accordance with its loan program requirements. After
      receipt of the broker loan package, Tribeca controls the processing,
      underwriting, approval/denial, legal and regulatory documents, closing and
      funding of the approved loan.




***Acquisition
      of Wholesale Mortgage Operation.*** In
      February 2007, Tribeca acquired a wholesale mortgage origination operation,
      which included the employment of approximately 60 sales and processing personnel
      located in Bridgewater, New Jersey.




Tribeca
      paid $485,000 for the associated fixed assets and assumed the lease obligation
      for the Bridgewater office facility. In addition, Tribeca took over the existing
      pipeline of “Alt-A” loans (loans on the credit scale between prime and subprime
      where the borrower possesses a strong credit history but is in need of
      non-traditional underwriting and processing) in various stages of processing
      as
      of the closing of the transaction, which included approximately $17 million
      of
      loans that were locked with the borrower out of a total pipeline of $27 million.
      Tribeca will pay 50 basis points to the seller of the wholesale mortgage
      origination operation for each loan in the acquired pipeline that is
      subsequently closed by Tribeca within 90 days of the acquisition. Tribeca did
      not purchase any closed loans or other assets, nor assume any liabilities other
      than those under the seller’s lease for the Bridgewater office
      space.




9




The
      principal purpose of the acquisition was to add experienced origination
      personnel and senior management to Tribeca in order to further expand the
      origination of its Liberty Loan products. At least initially, Tribeca will
      continue the Alt-A loan origination activities of the acquired wholesale
      operation; and, Tribeca intends to sell all Alt-A loan originations for cash
      in
      the secondary market on a whole-loan, servicing-released basis. The Alt-A
      product, while not new to the acquired wholesale unit, will be a new origination
      activity for Tribeca.




***Borrowers***




As
      with
      loans we acquire, borrowers of loans we originate are a diverse population
      and
      no single borrower represents a significant portion of our loans. Our borrowers
      are located in 34 states, with approximately 62% of the amount of loans
      originated in both 2006 and 2005 being secured by property in New York and
      New
      Jersey. At December 31, 2006, approximately 62% of originated loans held for
      investment is secured by property in New York and New Jersey.




***Secondary
      Marketing***




We
      sell a
      portion of the Tribeca loan originations for cash on a whole-loan,
      servicing-released basis. In 2006, we sold $119.8 million of loans and realized
      a net gain on sale of $1.9 million, and in 2005, we sold $60.7 million of loans
      and realized a net gain on sale of $1.3 million. The percentage of originated
      loans sold varies from year to year, depending on market conditions and our
      portfolio needs. We have not historically hedged our origination pipeline by
      entering into mandatory delivery commitments; however, many mortgage originators
      do so in the ordinary course of business and we may choose to do so in the
      future as well, if management deems it to be advantageous. The purchasers of
      the
      whole loans we do sell are typically large financial institutions. We regularly
      sell loans meeting specified loan underwriting and other criteria to several
      large financial institutions with whom we have ongoing investor
      relationships.




Certain
      whole-loan sale contracts include provisions requiring the Company to repurchase
      a loan if a borrower fails to make one or more of the first loan payments due
      on
      the loan after the date of sale. In addition, the purchaser may require that
      the
      Company refund a portion of the premium paid on the sale of mortgage loans
      if a
      loan is prepaid in full within a certain amount of time from the date of
      sale.




In
      January 2007, the Company repurchased $17.2 million of Liberty loans previously
      sold to investors. In addition, the Company has estimated potential additional
      repurchases of $26 million of Liberty loans previously sold in
      2006.




***Licensing***




Tribeca
      is currently licensed as a mortgage banker or exempt from licensing in 34
      states. Tribeca is also a Department of Housing and Urban Development FHA Title
      I and Title II approved lender.




***Products***




We
      vary
      our product offerings depending on market conditions. Our origination volume
      focuses on Liberty Loans, which we generally hold for investment in our own
      portfolio, and Gold and Platinum loans, which we originate for sale to investors
      as described above.




***Liberty
      Loans.*** During
      2006, a majority of our loan originations were conducted through our Liberty
      Loan program. The Liberty Loan is oriented toward borrowers typically in severe
      financial difficulty who are undergoing a transition in their credit profile
      due
      to unforeseen life events such as divorce, business failure, loss of employment,
      health crises and similar events. A substantial portion of our Liberty Loan
      originations serves as foreclosure bailouts for the borrowers. Our historical
      experience has been that Liberty Loan customers either pay off their loans
      in
      full by refinancing at a lower interest rate once they have re-established
      their
      credit record, or end up in the foreclosure process. Our experience has been
      that a good portion of the loans in the foreclosure process pay off in full
      before actual foreclosure. Currently, Liberty Loans are primarily
      adjustable-rate mortgages, or ARMs, with 30-year terms, with a fixed rate of
      interest for the first two years and a six-month adjustable rate of interest
      for
      the remaining term of the mortgage. The maximum Liberty Loan amount is $2
      million, with a maximum loan-to-value ratio of 75%. Our average Liberty Loan
      amount in 2006 was $223,000, and in 2005 was $229,000.




10




Our
      Liberty Loan application and approval process is streamlined, requiring little
      documentation. The principal factor in our underwriting guidelines has
      historically been our determination of the borrower’s equity in his or her home
      and the related calculation of the loan-to-value ratio based on the appraised
      value of the property, and not, or to a lesser extent, on a determination of
      the
      borrower’s ability to repay the loan. The specific parameters of the Liberty
      Loan program continue to evolve. In 2005, we began in an increasing number
      of
      cases to gather and analyze additional information that allows us to assess
      to a
      reasonable degree the borrower’s ability and intent to repay the loan in
      connection with our credit decision. We currently offer borrowers several
      variations of the Liberty Loan based on the amount of documentation provided
      by
      the borrower, with the loan-to-value ratio increasing to a maximum of 75% for
      the product variation requiring the most documentation supporting the ability
      and intent of the borrower to repay the loan and decreasing to a maximum of
      65%
      for the product variation requiring the least of such documentation. Throughout
      2006, loans were assessed to determine the borrower’s ability to make the
      required mortgage payments using debt-to-income ratio maximums, and taking
      into
      consideration compensating factors. However, the assessment of the borrower’s
      ability to pay is limited depending on the documentation requirements of the
      particular Liberty Loan product program. Prior to September 2006, we utilized
      third-party vendors to review the quality of the appraisals on all loans and
      we
      used broker price opinions only for loan amounts over $350,000. Effective in
      September 2006, broker price opinions were used for all loans to compare with
      appraisals in order to best assess the equity in the borrower’s
      home.




It
      is our
      policy not to originate loans that are subject to either HOEPA or the various
      state and local laws regarding “high-cost” loans. Consistent with what we
      believe are industry best practices, the Liberty Loan program, among other
      things, does not allow for negative amortization, interest-only payments, teaser
      rates, short-term balloon payments, the financing of single-premium credit
      life
      insurance, long-term prepayment penalties, interest rates that increase upon
      default, or mandatory arbitration clauses.




***Platinum
      and Gold Loans.*** The
      balance of our loan originations in 2006 were conducted through our Platinum
      and
      Gold programs. Borrowers of our Platinum and Gold loans typically have higher
      credit ratings than borrowers under loans that we hold for our portfolio, as
      they are underwritten to specific investor guidelines that require higher credit
      profiles. The maximum loan amount for Platinum and Gold Loans is $1 million
      and
      $500,000, respectively, with a loan-to-value ratio of up to 100%.




***Competition***




The
      market for non-prime loan originations is highly competitive. Tribeca competes
      with a variety of lenders, including banks and mortgage bankers, for the
      origination of non-prime mortgages. Among the largest and most well-established
      of these competitors have been New Century Mortgage, Ameriquest Mortgage,
      Countrywide Financial Corporation, Household Financial Services, Quality Home
      Loan, Imperial Wholesale Lending and Emigrant Mortgage. Many of our competitors
      possess greater financial resources, longer operating histories and lower costs
      of capital than we do. Competition for mortgage originations is based upon
      marketing efforts, loan processing capabilities, funding capacity, loan product
      desirability, interest rates and fees and, to a much lesser extent in our case,
      the ability to sell loans for a premium in the secondary market.




11




***Mortgage
      Banking Segment Summary Information***




The
      following table sets forth certain information regarding revenues, expenses
      and
      income before provision for income taxes for our mortgage banking
      segment:




**Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004****Revenues:**Interest
                income
            
            $
            41,219,970
            
            $
            24,331,218
            
            $
            6,591,458Purchase
                discount earned
            
            
            237,144
            
            
            459,742
            
            
            597,841Gain
                on sale of originated loans
            
            
            1,871,633
            
            
            1,276,566
            
            
            1,444,037Gain
                on sale of other real estate owned
            
            
            173,989
            
            
            34,181
            
            
            93,397Other
                income
            
            
            3,372,000
            
            
            1,263,883
            
            
            232,089Total
                revenues
            
            
            46,874,736
            
            
            27,365,590
            
            
            8,958,822**Operating
                expenses:**Interest
                expense
            
            
            33,960,553
            
            
            16,727,093
            
            
            3,265,066Collective,
                general and administrative
            
            
            5,718,053
            
            
            2,875,994
            
            
            1,641,152Provision
                for loan losses
            
            
            204,508
            
            
            1,004,388
            
            
            335,530Amortization
                of deferred financing costs
            
            
            1,970,040
            
            
            1,123,187
            
            
            334,651Depreciation
            
            
            291,065
            
            
            221,062
            
            
            114,342Total
                expenses
            
            
            42,144,219
            
            
            21,951,724
            
            
            5,690,741Income
                before provision for income taxes
            
            
            4,730,517
            
            
            5,413,866
            
            
            3,268,081Income
                tax provision
            
            
            2,034,122
            
            
            2,434,508
            
            
            1,503,317Net
                income
            
            $
            2,696,395
            
            $
            2,979,358
            
            $
            1,764,764Fixed-rate
                originations
            
            $
            25,728,501
            
            $
            36,636,445
            
            $
            54,128,022Adjustable-rate
                originations
            
            $
            359,015,077
            
            $
            390,624,027
            
            $
            146,173,263Total
                originations
            
            $
            384,743,578
            
            $
            427,260,472
            
            $
            200,301,285Loans
                sold
            
            $
            119,767,721
            
            $
            60,715,866
            
            $
            89,925,754





**Servicing**




Except
      for a short period of time after acquiring a pool of loans when servicing may
      be
      performed for us by the seller, we hold and service substantially all of the
      loans in our portfolio, including both purchased and originated loans, until
      resolution. At December 31, 2006, our servicing department consisted of 84
      employees who managed 31,323 loans, of which 2,451 had not yet been entered
      into
      our servicing system. Our servicing operations are conducted in the following
      departments:




***Loan
      Boarding and Administration*** **.** The
      primary objective of the loan boarding department is to ensure that newly
      acquired loans are properly transitioned from the prior servicer and that both
      newly acquired loans and originated loans are accurately boarded onto our
      servicing systems. In the bulk acquisition context, data generally is
      transmitted via an electronic file from the seller which is loaded directly
      onto
      our system, while data for originated loans and flow acquisitions is boarded
      directly by us onto our system. Our loan boarding department audits loan
      information for accuracy in approximately 10% of bulk purchased loans to ensure
      that the loans conform to the terms provided in the original note and mortgage.
      For the remaining bulk purchased loans, we perform verification of critical
      terms of the loans with information provided to us by the sellers. The
      information boarded onto our systems provides us with a file that we use to
      automatically generate introductory letters to borrowers summarizing the terms
      of their loan, among other standard industry procedures.




12




The
      loan
      administration department performs typical duties related to the administration
      of loans, including incorporating modifications to terms of loans as well as,
      in
      the case of acquisitions, completing and recording the assignment of collateral
      documents from the seller into our name, which it does in conjunction with
      our
      acquisition department. The loan administration department also ensures the
      proper maintenance and disbursement of funds from escrow accounts and monitors
      non-escrow accounts for delinquent taxes and insurance lapses. For purchased
      and
      originated loans with adjustable interest rates, the loan administration group
      ensures that adjustments are properly made and identified to the affected
      borrowers in a timely manner.




***Customer
      Service*** **.** The
      primary objective of our customer service department is to obtain timely
      payments from borrowers, respond to borrower requests and resolve disputes
      with
      borrowers. Within ten days of boarding newly acquired loans onto our servicing
      system, our customer service representatives contact each new borrower to
      welcome them to Franklin Credit Management Corporation and to gather and/or
      verify any missing information, such as loan balance, interest rate, contact
      phone numbers, place of employment, insurance coverage and all other pertinent
      information required to properly service the loan. The customer service group
      responds to all inbound customer calls for information requests regarding
      payments, statement balances, escrow balances and taxes, payoff requests,
      returned checks and late payment and other fees. In addition, our customer
      service representatives process payoff requests and reconveyances.




***Collections*** **.** The
      main
      objective of our collections department is to ensure loan performance through
      maintaining customer contact. Our collections group continuously reviews and
      monitors the status of collections and individual loan payments in order to
      proactively identify and solve potential collection problems. When a loan
      becomes seven days past due, our collections group begins making collection
      calls and generating past-due letters. Our collections group attempts to
      determine whether a past due payment is an aberration or indicative of a more
      serious delinquency. If the past due payment appears to be an aberration, we
      emphasize a cooperative approach and attempt to assist the borrower in becoming
      current or arriving at an alternative repayment arrangement. Upon a serious
      delinquency, by which we mean a delinquency of 61 days by a borrower, or the
      earlier determination by our collections group based on the evidence available
      that a serious delinquency is likely, the loan is typically transferred to our
      legal department where loss mitigation begins. We employ a range of strategies
      to modify repayment terms in order to enable the borrower to make payments
      and
      ultimately cure the delinquency, or focus on expediting the foreclosure process
      so that loss mitigation can begin as promptly as practicable.




***Legal*** **.** Our
      legal
      department, which consists of non-lawyer administrative staff experienced in
      collection work, manages and monitors the progress of seriously delinquent
      loans
      and loans which we believe will develop into serious delinquencies. In addition
      to maintaining contact with borrowers through telephone calls and collection
      letters, this department utilizes various strategies in an effort to reinstate
      an account or revive cash flow on an account. The legal department analyzes
      each
      loan to determine a collection strategy to maximize the amount and speed of
      recovery and minimize costs. The particular strategy is based upon each
      individual borrower’s past payment history, current credit profile, current
      ability to pay, collateral lien position and current collateral value. We employ
      a range of strategies depending on the specific situation, including the
      following:




·
            Short-term
                repayment plans, or forbearance plans, when a delinquency can be
                cured
                within six months;




13




·
            Loan
                modifications, when a delinquency cannot be cured within three months
                but
                the borrower has the financial ability to abide by the terms of the
                loan
                modification;




·
            Short
                sales, when the borrower does not have the ability to repay and the
                equity
                in the property is not sufficient to satisfy the total amount due
                under
                the loan, but we accept the sale price of the property in full
                satisfaction of the debt in order to expedite the process for all
                parties
                involved;




·
            Deed-in-lieu,
                when the borrower does not have the ability to repay and the equity
                in the
                property is not sufficient to satisfy the total amount due, but we
                accept
                the deed in full satisfaction of the debt in order to expedite the
                process
                for all parties involved;




·
            Assumption,
                when the borrower wishes to relinquish responsibility to a third
                party and
                the prospective borrower demonstrates the ability to repay the
                loan;




·
            Subordination,
                when we have the second lien on a property and the first lien-holder
                wishes to refinance its loan, to which we will agree if the terms
                of the
                refinanced loan permit the borrower to repay our loan;
                and




·
            Deferment
                agreements, when we forgo collection efforts for a period of time,
                typically as a result of a hardship incurred by the borrower, such
                as a
                natural disaster or a death or illness in the family, as a result
                of which
                the borrower is temporarily unable to
                repay.




Seriously
      delinquent accounts not resolved through the loss mitigation activities
      described above are foreclosed in accordance with state and local laws, with
      the
      objective of maximizing asset recovery in the most expeditious manner possible.
      This is commonly referred to as loss management. Foreclosure timelines are
      managed through a timeline report built into the loan servicing system. The
      report schedules milestones applicable for each state throughout the foreclosure
      process, which enhances our ability to monitor and manage the process.
      Properties acquired through foreclosure are transferred to our real estate
      department to manage eviction and marketing of the properties. However, until
      foreclosure is completed, efforts at loss mitigation are continued.




In
      addition, our legal department manages loans by borrowers who have declared
      bankruptcy. The primary objective of the bankruptcy group within our legal
      department, which utilizes outside counsel, is to proactively monitor bankruptcy
      assets and outside counsel to ensure compliance with individual plans and to
      ensure recovery in the event of non-compliance.




***Real
      Estate*** **.** Our real
      estate department manages all properties acquired by us upon foreclosure of
      a
      delinquent loan or through purchase as part of a loan portfolio in order to
      preserve their value and ensure that maximum returns are realized upon sale.
      We
      own real estate, or OREO, in various states that we acquired through
      foreclosure, a deed-in-lieu or acquisition. These properties are 1-4 family
      residences, co-ops and condos. We acquire or foreclose on property primarily
      with the intent to sell it at a price to at least recover our cost. From time
      to
      time, OREO properties may be in need of repair or improvements in order to
      either increase the value of the property or reduce the time that the property
      is on the market. In those cases, the OREO property is evaluated independently
      and we make a determination of whether the additional investment would increase
      our return upon sale of the property.




14


**Portfolio
      Characteristics**




***Overall
      Portfolio***




At
      December 31, 2006, our portfolio (excluding OREO) consisted of $1.25 billion
      of
      notes receivable (inclusive of purchase discount not reflected on the face
      of
      the balance sheet), $425 million of loans held for investment and $4 million
      of
      loans held for sale. Our total loan portfolio grew 22% to $1.66 billion at
      December 31, 2006, from $1.36 billion at December 31, 2005. Not boarded loans
      represent loans serviced by the seller on a temporary basis. The following
      table
      sets forth information regarding the types of properties securing our
      loans.




**Property
                Types**
            
            **Principal
                Balance**
            
            **Percentage
                of Total**
              **Principal
                Balance**Residential
                1-4 family
            
            $
            1,359,736,409
            
            
            81.89
            %Condos,
                co-ops, PUD dwellings
            
            
            188,936,447
            
            
            11.38
            %Manufactured
                and mobile homes
            
            
            22,707,873
            
            
            1.37
            %Multi-family
            
            
            781,820
            
            
            0.05
            %Secured,
                property type unknown(1)
            
            
            27,545,952
            
            
            1.66
            %Commercial
            
            
            2,204,517
            
            
            0.13
            %Unsecured
                loans
            
            
            21,265,089
            
            
            1.28
            %Other
            
            
            615,016
            
            
            0.03
            %Not
                boarded(2)
            
            
            36,687,620
            
            
            2.21
            %Total(3)
            
            $
            1,660,480,743
            
            
            100.00
            %







(1)
            The
                loans included in this category are principally small balance (less
                than
                $10,000) second-lien loans acquired, and are collateralized by residential
                real estate.





(2)
            A
                portion of not boarded loans has been included in the appropriate
                property
                type categories based on available information provided by the
                servicer-seller. The total amount of not boarded loans was $129.9
                million
                at December 31, 2006.





(3)
            Excludes
                $17.2 million of loans sold to investors, which the Company committed
                to
                repurchase, that are included on the face of the balance sheet at
                December
                31, 2006.





15


***Geographic
      Dispersion.*** The
      following table sets forth information regarding the geographic location of
      properties securing the loans in our portfolio at December 31,
      2006:




**Location**
            
            **Principal
                Balance**
            
            **Percentage
                of Total**
              **Principal
                Balance**California
            
            $
            209,422,516
            
            
            12.61
            %New
                York
            
            
            182,872,910
            
            
            11.01
            %New
                Jersey
            
            
            156,531,051
            
            
            9.43
            %Florida
            
            
            114,884,839
            
            
            6.92
            %Texas
            
            
            80,068,341
            
            
            4.82
            %Pennsylvania
            
            
            75,382,452
            
            
            4.54
            %Ohio
            
            
            71,579,388
            
            
            4.31
            %Illinois
            
            
            61,621,446
            
            
            3.71
            %Michigan
            
            
            52,218,421
            
            
            3.15
            %Maryland
            
            
            49,761,439
            
            
            3.00
            %All
                Others
            
            
            606,137,940
            
            
            36.50
            %Total*
            
            $
            1,660,480,743
            
            
            100.00
            %





*
            Excludes
                $17.2 million of loans sold to investors, which the Company committed
                to
                repurchase, that are included on the face of the balance sheet at
                December
                31, 2006.




Amounts
      included in the tables above under the heading “Principal Balance” represent the
      aggregate unpaid principal balance outstanding of notes receivable, loans held
      for investment and loans held for sale.


16


***Asset
      Quality***




***Delinquency*** **.** The
      following tables provide a breakdown of the delinquency status of our notes
      receivable, loans held for investment and loans held for sale portfolios as
      of
      the dates indicated, by principal balance. Because we specialize in acquiring
      and servicing loans with erratic payment patterns and an elevated level of
      credit risk, a portion of the loans we acquire are in various stages of
      delinquency, foreclosure and bankruptcy when we acquire them. We monitor the
      payment status of our borrowers based on both contractual delinquency and
      recency delinquency. By contractual delinquency, we mean the delinquency of
      payments relative to the contractual obligations of the borrower. By recency
      delinquency, we mean the recency of the most recent full monthly payment
      received from the borrower. By way of illustration, on a recency delinquency
      basis, if the borrower has made the most recent full monthly payment within
      the
      past 30 days, the loan is shown as current regardless of the number of
      contractually delinquent payments. In contrast, on a contractual delinquency
      basis, if the borrower has made the most recent full monthly payment, but has
      missed an earlier payment or payments, the loan is shown as contractually
      delinquent. We classify a loan as in foreclosure when we determine that the
      best
      course of action to maximize recovery of unpaid principal balance is to begin
      the foreclosure process. We classify a loan as in bankruptcy when we receive
      notice of a bankruptcy filing from the bankruptcy court.




**December
                31, 2006****Contractual
                Delinquency**
            
            **Recency
                Delinquency****Days
                Past Due**
            
            **Amount**
            ****
            **%**
            ****
            **Amount**
            ****
            **%****Current**
            
            
            0
                - 30 days
            
            $
            961,563,124
            
            
            57.91
            %
            $
            1,096,675,851
            
            
            66.04
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            89,662,792
            
            
            5.40
            %
            
            57,397,832
            
            
            3.46
            %61
                  - 90 days
            
            
            12,558,911
            
            
            0.76
            %
            
            20,572,952
            
            
            1.24
            %90+
                  days
            
            
            195,922,320
            
            
            11.80
            %
            
            85,060,512
            
            
            5.12
            %**Bankruptcy**
            
            
            0
                - 30 days
            
            
            38,276,181
            
            
            2.31
            %
            
            101,649,384
            
            
            6.12
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            8,523,006
            
            
            0.51
            %
            
            6,957,591
            
            
            0.42
            %61
                - 90 days
            
            
            3,231,686
            
            
            0.19
            %
            
            2,920,336
            
            
            0.18
            %90+
                  days
            
            
            104,883,243
            
            
            6.32
            %
            
            43,386,805
            
            
            2.61
            %**Foreclosure**
            
            
            0
                - 30 days
            
            
            622,379
            
            
            0.04
            %
            
            8,371,118
            
            
            0.50
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            214,085
            
            
            0.01
            %
            
            1,789,362
            
            
            0.11
            %61
                  - 90 days
            
            
            244,283
            
            
            0.02
            %
            
            2,593,268
            
            
            0.16
            %90+
                  days
            
            
            208,091,113
            
            
            12.53
            %
            
            196,418,112
            
            
            11.83
            %**Not
                Boarded****(1)**
            
            
            
            
            
            36,687,620
            
            
            2.21
            %
            
            36,687,620
            
            
            2.21
            %**Total****(2)**
            
            $
            1,660,480,743
            
            
            100.00
            %
            $
            1,660,480,743
            
            
            100.00
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            1,000,461,684
            
            
            60.25
            %
            $
            1,206,696,353
            
            
            72.67
            %







(1)
            Not
                boarded represents recently acquired loans serviced by the seller
                on a
                temporary basis. A portion of not boarded loans has been included
                in the
                appropriate delinquency categories based on information provided
                by the
                seller-servicer. The remaining portion of not boarded loans, for
                which
                information has not been entered into our servicing system, is shown
                in
                the not boarded category.


(2)
            Excludes
                $17.2 million of loans sold to investors, which the Company committed
                to
                repurchase, that are included on the face of the balance sheet at
                December
                31, 2006.




17





**December
                31, 2005****Contractual
                Delinquency**
            
            **Recency
                Delinquency****Days
                Past Due**
            
            **Amount**
            ****
            **%**
            ****
            **Amount**
            ****
            **%****Current**
            
            
            0
                - 30 days
            
            $
            687,887,057
            
            
            50.68
            %
            $
            791,779,227
            
            
            58.33
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            76,225,331
            
            
            5.61
            %
            
            36,316,774
            
            
            2.68
            %61
                  - 90 days
            
            
            19,629,463
            
            
            1.45
            %
            
            15,938,651
            
            
            1.17
            %90+
                  days
            
            
            139,882,279
            
            
            10.30
            %
            
            79,589,478
            
            
            5.86
            %**Bankruptcy**
            
            
            0
                - 30 days
            
            
            38,018,748
            
            
            2.80
            %
            
            108,931,183
            
            
            8.02
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            11,207,345
            
            
            0.83
            %
            
            7,845,350
            
            
            0.58
            %61
                  - 90 days
            
            
            4,725,448
            
            
            0.35
            %
            
            4,851,743
            
            
            0.36
            %90+
                  days
            
            
            113,808,976
            
            
            8.38
            %
            
            46,132,241
            
            
            3.40
            %**Foreclosure**
            
            
            0
                - 30 days
            
            
            793,327
            
            
            0.06
            %
            
            8,414,493
            
            
            0.62
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            606,737
            
            
            0.04
            %
            
            2,934,832
            
            
            0.22
            %61
                  - 90 days
            
            
            895,794
            
            
            0.07
            %
            
            2,444,743
            
            
            0.18
            %90+
                  days
            
            
            131,112,327
            
            
            9.66
            %
            
            119,614,117
            
            
            8.81
            %**Not
                Boarded*******
            
            
            
            
            
            132,573,874
            
            
            9.77
            %
            
            132,573,874
            
            
            9.77
            %**Total**
            
            $
            1,357,366,706
            
            
            100.00
            %
            $
            1,357,366,706
            
            
            100.00
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            726,699,132
            
            
            53.54
            %
            $
            909,124,903
            
            
            66.98
            %





*
            Not
                boarded represents recently acquired loans serviced by the seller
                on a
                temporary basis. A portion of not boarded loans has been included
                in the
                appropriate delinquency categories based on information provided
                by the
                seller-servicer. The remaining portion of not boarded loans, for
                which
                information has not been entered into our servicing system, is shown
                in
                the not boarded category.




18


***Notes
      Receivable Portfolio***




As
      of
      December 31, 2006, our notes receivable portfolio, which consists of purchased
      loans, included approximately 29,460 loans with an aggregate unpaid principal
      balance (“UPB”) of $1.25 billion, compared with approximately 23,684 loans with
      an aggregate UPB of $970 million as of December 31, 2005. Impaired loans
      comprise and will continue to comprise a significant portion of our portfolio.
      Many of the loans we acquire are impaired loans at the time of purchase. We
      generally purchase such loans at significant discounts and have considered
      the
      payment status, underlying collateral value and expected cash flows when
      determining our purchase price. While interest income generally is not accrued
      on impaired loans, interest and fees are received on a portion of loans
      classified as impaired. The following table provides a breakdown of the notes
      receivable portfolio by year:




**2006**
            
            **2005**
            
            **2004**Performing
                loans
            
            $
            866,296,721
            
            $
            536,974,892
            
            $
            436,366,893Allowance
                for loan losses
            
            
            7,745,261
            
            
            14,266,781
            
            
            19,154,310Nonaccretable
                discount*
            
            
            29,536,412
            
            
            5,423,419
            
            
            -Total
                performing loans,net
                of allowance for loan losses and nonaccretable discount
            
            
            829,015,048
            
            
            517,284,692
            
            
            417,212,583Impaired
                loans
            
            
            251,210,748
            
            
            244,986,933
            
            
            280,078,060Allowance
                for loan losses
            
            
            44,679,114
            
            
            43,691,572
            
            
            57,889,091Nonaccretable
                discount*
            
            
            19,892,190
            
            
            8,529,588
            
            
            -Total
                impaired loans,net
                of allowance for loan losses and nonaccretable discount
            
            
            186,639,444
            
            
            192,765,773
            
            
            222,188,969Not
                yet boarded onto servicing system
            
            
            129,906,356
            
            
            188,037,218
            
            
            95,440,903Allowance
                for loan losses
            
            
            -
            
            
            9,317,802
            
            
            12,584,898Nonaccretable
                discount*
            
            
            11,102,901
            
            
            10,028,006
            
            
            -Not
                yet boarded onto servicing system,net
                of allowance for loan losses and nonaccretable discount
            
            
            118,803,455
            
            
            168,691,410
            
            
            82,856,005Total
                notes receivable,net
                of allowance for loan losses and nonaccretable discount
            
            
            1,134,457,947
            
            
            878,741,875
            
            
            722,257,557Accretable
                discount*
            
            
            12,842,755
            
            
            11,360,617
            
            
            -Total
                Notes Receivable,net
                of allowance for loan losses and accretable/nonaccretable
                discount
            
            $
            1,121,615,192
            
            $
            867,381,258
            
            $
            722,257,557







*
            Represents
                purchase discount not reflected on the face of the balance sheet
                in
                accordance with SOP 03-3 for loans acquired after December 31, 2004.
                Accretable discount is the excess of the loan’s estimated cash flows over
                the purchase prices, which is accreted into income over the life
                of the
                loan. Nonaccretable discount is the excess of the undiscounted contractual
                cash flows over the undiscounted cash flows estimated at the time
                of
                acquisition.


19




The
      following table provides a breakdown of the balance of our portfolio of notes
      receivable between fixed-rate and adjustable-rate loans, net of allowance for
      loan losses and excluding loans purchased but not yet boarded onto our servicing
      operations system as of December 31, 2006, December 31, 2005 and December 31,
      2004 of $129,906,356, $178,719,416, and $82,856,005, respectively:




**2006**
            
            **2005**
            
            **2004***Performing
                Loans:*Fixed-rate
                Performing Loans
            
            $
            755,334,985
            
            $
            393,982,311
            
            $
            300,286,566Adjustable-rate
                Performing Loans
            
            
            103,216,474
            
            
            128,725,800
            
            
            116,926,017*Total
                Performing Loans*
            
            $
            858,551,459
            
            $
            522,708,111
            
            $
            417,212,583*Impaired
                Loans:*Fixed-rate
                Impaired Loans
            
            $
            169,586,108
            
            $
            167,093,004
            
            $
            184,312,204Adjustable-rate
                Impaired Loans
            
            
            36,945,527
            
            
            34,202,357
            
            
            37,876,765*Total
                Impaired Loans*
            
            $
            206,531,635
            
            $
            201,295,361
            
            $
            222,188,969Total
                Notes
            
            $
            1,065,083,094
            
            $
            724,003,472
            
            $
            639,401,552Accretable
                Discount
            
            $
            12,842,755
            
            $
            11,360,617
            
            $
            -Nonaccretable
                Discount
            
            $
            49,428,602
            
            $
            13,953,006
            
            $
            -Total
                Notes Receivable,net
                of allowance for loan losses,excluding
                loans not boarded onto servicing systems
            
            $
            1,002,811,737
            
            $
            698,689,849
            
            $
            639,401,552





Impaired
      loans comprise and will continue to comprise a significant portion of our
      portfolio. Many of the loans we acquire are impaired loans at the time of
      purchase. We generally purchase such loans at significant discounts and have
      considered the payment status, underlying collateral value and expected cash
      flows when determining our purchase price. While interest income generally
      is
      not accrued on impaired loans, interest and fees are received on a portion
      of
      loans classified as impaired.




***Loan
      Acquisitions***




We
      purchased over $621 million in assets (principally single-family residential
      loans secured by second liens) in 2006, compared with approximately $506 million
      in assets (principally single-family residential loans secured by second liens)
      during 2005 and approximately $652 million in assets (principally single-family
      residential loans) during 2004. A substantial portion of the loans we acquired
      in 2004 resulted from the purchase of two large portfolios, which together
      represented over $400 million in UPB at the time of acquisition. The following
      table sets forth the amounts and purchase prices of our mortgage loan
      acquisitions during the previous three calendar years:




**2006**
            
            **2005**
            
            **2004**Number
                of loans
            
            
            12,881
            
            
            12,311
            
            
            12,914Aggregate
                unpaid principal balance at acquisition
            
            $
            621,441,190
            
            $
            505,655,681
            
            $
            625,762,750*Purchase
                price
            
            $
            572,011,360
            
            $
            468,324,936
            
            $
            544,288,354Purchase
                price percentage
            
            
            92
            %
            
            93
            %
            
            87
            %







*  Exclusive
      of credit card portfolio in the amount of $26.3 million.




20




***Notes
      Receivable Dispositions***




In
      the
      ordinary course of our loan servicing process and through the periodic review
      of
      our portfolio of purchased loans, there are certain loans that, for various
      reasons, we determine to sell. We typically sell these loans on a whole-loan,
      servicing-released basis, for cash. The following table sets forth our
      dispositions of purchased loans during the previous three calendar
      years:




**2006**
            
            **2005**
            
            **2004****Sale
                of Performing Loans**Aggregate
                unpaid principal balance
            
            $
            3,784,126
            
            $
            13,573,871
            
            $
            19,845,833Gain
                on sale
            
            $
            94,862
            
            $
            1,263,866
            
            $
            2,178,295**Sale
                of Non-Performing Loans**Aggregate
                unpaid principal balance
            
            $
            161,149
            
            $
            23,491,405*
            
            $
            1,154,505Gain
                (loss) on sale
            
            $
            69,049
            
            $
            47,021
            
            $
            (477,182
            )Total
                gain on sale
            
            $
            163,911
            
            $
            1,310,887
            
            $
            1,701,113







*  Sale
      of
      credit card portfolio. The carrying value of this portfolio was $1.2
      million.




***Tribeca’s
      Loan Originations***




The
      following table sets forth Tribeca’s loan originations, as well as dispositions,
      during the previous three calendar years. During 2004, we began to originate
      loans, principally adjustable-rate loans with a fixed rate for the first two
      years, to be held in our portfolio. During 2006, we began to sell a portion
      of
      our newly originated adjustable-rate Liberty Loans on a whole-loan,
      servicing-released basis.




**2006**
            
            **2005**
            
            **2004**Number
                of loans originated
            
            1,696
            
            1,871
            
            1,159Original
                principal balance
            
            $
            384,743,578
            
            $
            427,260,472
            
            $
            200,301,285Average
                loan amount
            
            $
            226,854
            
            $
            228,359
            
            $
            172,823Originated
                as fixed
            
            $
            25,728,501
            
            $
            36,636,445
            
            $
            54,128,022Originated
                as ARM*
            
            $
            359,015,077
            
            $
            390,624,027
            
            $
            146,173,263Number
                of loans sold
            
            
            533
            
            
            297
            
            
            576Aggregate
                face value
            
            $
            119,767,721**
            
            $
            60,715,866
            
            $
            89,925,754Gain
                on sale
            
            $
            1,871,633**
            
            $
            1,276,566
            
            $
            1,444,037Gain
                on sale percentage
            
            
            1.56
            %
            
            2.10
            %
            
            1.61
            %







*
            Originated
                ARM loans are principally fixed-rate for the first two years and
                six-month
                adjustable-rate for the remaining term.


**
            At
                December 31, 2006, approximately $43 million of sold loans were
                anticipated to be repurchased. The gain on sale includes a reserve
                for the
                portion of the gain that relates to the gain recognized on the sold
                loans
                expected to be repurchased.





21


***Other
      Real Estate Owned***




The
      following table sets forth our real estate owned, or OREO portfolio, and OREO
      sales during the previous three calendar years:




**2006**
            
            **2005**
            
            **2004**Other
                real estate owned
            
            $
            22,977,725
            
            $
            19,936,274
            
            $
            20,626,156OREO
                as a percentage of total assets
            
            
            1.38
            %
            
            1.50
            %
            
            2.33
            %OREO
                sold
            
            $
            30,407,208
            
            $
            30,697,381
            
            $
            20,273,482Gain
                on sale
            
            $
            1,918,822
            
            $
            1,758,351
            
            $
            542,202





***Geographic
      Dispersion of Originated Loans.*** The
      following table sets forth information regarding the geographic location of
      properties securing all loans originated by Tribeca during 2006 and the
      aggregate portfolio of loans originated and held for investment at December
      31,
      2006:




**Loans
                Originated**
              **for
                Year Ended December 31, 2006**
            
            **Loans
                Held for Investment**
              **at
                December 31, 2006****Location**
            
            **Principal**
              **Balance**
            
            **Percentage
                of Total**
              **Principal
                Balance**
            
            **Principal**
              **Balance**
            
            **Percentage
                of Total**
              **Principal
                Balance**New
                Jersey
            
            $
            121,814,914
            
            
            31.66
            %
            $
            126,934,168
            
            
            31.15
            %New
                York
            
            
            116,809,178
            
            
            30.36
            %
            
            124,523,220
            
            
            30.56
            %Pennsylvania
            
            
            26,324,425
            
            
            6.84
            %
            
            37,637,740
            
            
            9.24
            %Florida
            
            
            22,467,674
            
            
            5.84
            %
            
            20,172,002
            
            
            4.95
            %Maryland
            
            
            21,166,509
            
            
            5.50
            %
            
            19,789,152
            
            
            4.86
            %Massachusetts
            
            
            20,220,700
            
            
            5.25
            %
            
            22,079,487
            
            
            5.42
            %Virginia
            
            
            15,419,353
            
            
            4.01
            %
            
            13,110,118
            
            
            3.22
            %Connecticut
            
            
            10,700,850
            
            
            2.78
            %
            
            12,631,698
            
            
            3.10
            %California
            
            
            7,489,600
            
            
            1.95
            %
            
            8,621,618
            
            
            2.11
            %North
                Carolina
            
            
            4,373,451
            
            
            1.14
            %
            
            3,240,969
            
            
            0.79
            %All
                Others
            
            
            17,956,924
            
            
            4.67
            %
            
            18,765,830
            
            
            4.60
            %Total*
            
            $
            384,743,578
            
            
            100.00
            %
            $
            407,506,002
            
            
            100.00
            %







*
            UPB
                before net deferred fees and allowance for loan losses. Excludes
                $17.2
                million of loans sold to investors, which the Company committed to
                repurchase, that are included on the face of the balance sheet at
                December
                31, 2006.





22


***Delinquency*** **.** The
      following tables provide a breakdown of the delinquency status of our loans
      held
      for investment and loans held for sale portfolios as of the dates indicated,
      by
      principal balance. Because we specialize in originating residential mortgage
      loans for individuals with credit histories, income and/or factors that cause
      them to be classified as subprime borrowers, a substantially greater portion
      of
      the loans we originate experience varying degrees of delinquency, foreclosure
      and bankruptcy than those of prime lenders. However, due to the fairly
      conservative loan-to-value ratios, we typically collect full payment of
      principal and interest on delinquent loans that are in the process of
      foreclosure. We monitor the payment status of our borrowers based on both
      contractual delinquency and recency delinquency. By contractual delinquency,
      we
      mean the delinquency of payments relative to the contractual obligations of
      the
      borrower. By recency delinquency, we mean the recency of the most recent full
      monthly payment received from the borrower. By way of illustration, on a recency
      delinquency basis, if the borrower has made the most recent full monthly payment
      within the past 30 days, the loan is shown as current regardless of the number
      of contractually delinquent payments. In contrast, on a contractual delinquency
      basis, if the borrower has made the most recent full monthly payment, but has
      missed an earlier payment or payments, the loan is shown as contractually
      delinquent. We classify a loan as in foreclosure when we determine that the
      best
      course of action to maximize recovery of unpaid principal balance is to begin
      the foreclosure process. We classify a loan as in bankruptcy when we receive
      notice of a bankruptcy filing from the bankruptcy court.




**December
                31, 2006****Contractual
                Delinquency**
            
            **Recency
                Delinquency****Days
                Past Due**
            
            **Amount**
            ****
            **%**
            ****
            **Amount**
            ****
            **%****Current**
            
            
            0
                - 30 days
            
            $
            188,855,227
            
            
            45.72
            %
            $
            239,784,515
            
            
            58.05
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            31,652,388
            
            
            7.66
            %
            
            23,558,856
            
            
            5.70
            %61
                  - 90 days
            
            
            2,561,701
            
            
            0.62
            %
            
            8,105,861
            
            
            1.96
            %90+
                  days
            
            
            76,292,627
            
            
            18.47
            %
            
            27,912,711
            
            
            6.76
            %U**Bankruptcy**U
            
            
            0
                - 30 days
            
            
            134,904
            
            
            0.03
            %
            
            2,039,871
            
            
            0.49
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            55,652
            
            
            0.02
            %
            
            330,509
            
            
            0.08
            %61
                  - 90 days
            
            
            -
            
            
            -
            
            
            -
            
            
            -90+
                  days
            
            
            9,885,179
            
            
            2.39
            %
            
            7,705,355
            
            
            1.87
            %U**Foreclosure****(1)**
            
            
            0
                - 30 days
            
            
            -
            
            
            -
            
            
            1,894,422
            
            
            0.46
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            -
            
            
            -
            
            
            621,003
            
            
            0.15
            %61
                  - 90 days
            
            
            -
            
            
            -
            
            
            1,258,886
            
            
            0.31
            %90+
                  days
            
            
            103,629,240
            
            
            25.09
            %
            
            99,854,929
            
            
            24.17
            %**Total****(2)**
            
            $
            413,066,918
            
            
            100.00
            %
            $
            413,066,918
            
            
            100.00
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            188,990,131
            
            
            45.75
            %
            $
            243,718,808
            
            
            59.00
            %







(1)
            $103.6
                million of loans were in various stages of the foreclosure process;
                our
                servicing practice for this portfolio is to move loans into our
                foreclosure collection process at an early stage of
                delinquency.





(2)
            Excludes
                $17.2 million of loans sold to investors, which the Company committed
                to
                repurchase, that are included on the face of the balance sheet at
                December
                31, 2006.


23







**December
                31, 2005****Contractual
                Delinquency**
            
            **Recency
                Delinquency****Days
                Past Due**
            
            **Amount**
            ****
            **%**
            ****
            **Amount**
            ****
            **%****Current**
            
            
            0
                - 30 days
            
            $
            277,508,660
            
            
            71.64
            %
            $
            309,162,953
            
            
            79.81
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            29,203,954
            
            
            7.54
            %
            
            15,606,343
            
            
            4.03
            %61
                  - 90 days
            
            
            8,504,760
            
            
            2.20
            %
            
            7,192,915
            
            
            1.86
            %90+
                  days
            
            
            23,073,068
            
            
            5.95
            %
            
            6,328,231
            
            
            1.63
            %U**Bankruptcy**U
            
            
            0
                - 30 days
            
            
            859,676
            
            
            0.22
            %
            
            1,697,063
            
            
            0.44
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            341,989
            
            
            0.09
            %
            
            101,250
            
            
            0.02
            %61
                  - 90 days
            
            
            279,669
            
            
            0.07
            %
            
            66,490
            
            
            0.02
            %90+
                  days
            
            
            1,842,298
            
            
            0.48
            %
            
            1,458,829
            
            
            0.38
            %U**Foreclosure*******U
            
            
            0
                - 30 days
            
            
            -
            
            
            -
            
            
            2,659,754
            
            
            0.69
            %**Delinquent**
            
            
            31
                - 60 days
            
            
            606,737
            
            
            0.16
            %
            
            1,113,952
            
            
            0.29
            %61
                  - 90 days
            
            
            669,889
            
            
            0.17
            %
            
            638,318
            
            
            0.16
            %90+
                  days
            
            
            44,476,962
            
            
            11.48
            %
            
            41,341,564
            
            
            10.67
            %**Total**
            
            $
            387,367,662
            
            
            100.00
            %
            $
            387,367,662
            
            
            100.00
            %**Total
                loans**
            
            
            **0
                - 30 days**
            
            $
            278,368,336
            
            
            71.86
            %
            $
            313,519,770
            
            
            80.94
            %







*
            $45.8
                million of loans were in various stages of the foreclosure process;
                our
                servicing practice for this portfolio is to move loans into our
                foreclosure collection process at an early stage of
                delinquency.





During
      2006, our loans held for investment, principally Liberty Loans, became more
      seasoned and, as anticipated, a significant portion of our Liberty Loans were
      moved into the foreclosure process. At December 31, 2006, $102.7 million of
      Liberty Loans, or 24.9% of the portfolio of loans held for investment were
      in
      our foreclosure process, compared with $44.7 million, or 11.5%, at December
      31,
      2005. At December 31, 2006, our Servicing department personnel evaluated the
      collateral of each loan in the foreclosure process for its estimated realizable
      value, utilizing updated BPOs; the estimated losses on disposition aggregated
      approximately $500,000.




Our
      experience with Liberty Loans is that a percentage of the loans in the
      foreclosure process pay off in full, including approximately 90% of all unpaid
      interest due at the time of payoff, prior to actual foreclosure sale. During
      2006, $104.0 million of Liberty Loans (unpaid principal) paid off in full and
      the Company received approximately $5.9 million in past due
      interest.




24


**Government
        Regulation**
  The
        mortgage lending industry is highly regulated. Our business is regulated
        by
        federal, state and local government authorities and is subject to federal,
        state
        and local laws, rules and regulations, as well as judicial and administrative
        decisions that impose requirements and restrictions on our business. At the
        federal level, these laws, rules and regulations include:
  ·
              the
                  Equal Credit Opportunity Act and Regulation
                  B;
  ·
              the
                  Federal Truth in Lending Act and Regulation
                  Z;
  ·
              Home
                  Ownership and Equity Protection Act, or
                  HOEPA;
  ·
              the
                  Real Estate Settlement Procedures Act, or RESPA, and Regulation
                  X;
  ·
              the
                  Fair Credit Reporting Act;
  ·
              the
                  Fair Debt Collection Practices Act;
  ·
              the
                  Home Mortgage Disclosure Act and Regulation
                  C;
  ·
              the
                  Fair Housing Act;
  ·
              the
                  Telemarketing and Consumer Fraud and Abuse Prevention
                  Act;
  ·
              the
                  Telephone Consumer Protection Act;
  ·
              the
                  Gramm-Leach-Bliley Act;
  ·
              the
                  Soldiers and Sailors Civil Relief
                  Act;
  ·
              the
                  Fair and Accurate Credit Transactions Act;
                  and
  ·
              the
                  CAN-SPAM Act.
  These
        laws, rules and regulations, among other things:
  ·
              impose
                  licensing obligations and financial requirements on us;
  ·
              limit
                  the interest rates, finance charges, and other fees that we may
                  charge;
  ·
              prohibit
                  discrimination both in the extension of credit and in the terms
                  and
                  conditions on which credit is extended;
  ·
              prohibit
                  the payment of kickbacks for the referral of business incident
                  to a real
                  estate settlement service;
  ·
              impose
                  underwriting requirements;
  ·
              mandate
                  various disclosures and notices to consumers, as well as disclosures
                  to
                  governmental entities;
  25
  ·
              mandate
                  the collection and reporting of statistical data regarding our
                  customers;
  ·
              require
                  us to safeguard non-public information about our
                  customers;
  ·
              regulate
                  our collection practices;
  ·
              require
                  us to combat money-laundering and avoid doing business with suspected
                  terrorists;
  ·
              restrict
                  the marketing practices we may use to find customers, including
                  restrictions on outbound telemarketing; and
  ·
              in
                  some cases, impose assignee liability on us as purchaser of mortgage
                  loans
                  as well as the entities that purchase our mortgage
                  loans.
  Our
        failure to comply with these laws can lead to:
  ·
              civil
                  and criminal liability, including potential monetary penalties;
  ·
              loss
                  of lending licenses or approved status required for continued lending
                  and
                  servicing operations;
  ·
              demands
                  for indemnification or loan repurchases from purchasers of our
                  loans;
  ·
              legal
                  defenses causing delay and expense;
  ·
              adverse
                  effects on our ability, as servicer, to enforce loans;
  ·
              the
                  borrower having the right to rescind or cancel the loan transaction;
  ·
              adverse
                  publicity;
  ·
              individual
                  and class action lawsuits;
  ·
              administrative
                  enforcement actions;
  ·
              damage
                  to our reputation in the industry;
  ·
              inability
                  to sell or securitize our loans; or
  ·
              inability
                  to obtain credit to fund our
                  operations.


Although
        we have systems and procedures directed to compliance with these legal
        requirements and believe that we are in material compliance with all applicable
        federal, state and local statutes, rules and regulations, we cannot provide
        assurance that more restrictive laws and regulations will not be adopted
        in the
        future, or that governmental bodies will not interpret existing laws or
        regulations in a more restrictive matter, which could render our current
        business practices non-compliant or which could make compliance more difficult
        or expensive. These applicable laws and regulations are subject to
        administrative or judicial interpretation, but some of these laws and
        regulations have been enacted only recently or may be interpreted infrequently
        or only recently and inconsistently. As a result of infrequent, sparse or
        conflicting interpretations, ambiguities in these laws and regulations may
        leave
        uncertainty with respect to permitted or restricted conduct under them. Any
        ambiguity under a law to which we are subject may lead to non-compliance
        with
        applicable regulatory laws and regulations. We actively analyze and monitor
        the
        laws, rules and regulations that apply to our business, as well as the changes
        to such laws, rules and regulations.
  26




*New
      Areas of
      Regulation*




Regulatory
      and legal requirements are subject to change, making our compliance more
      difficult or expensive, or otherwise restricting our ability to conduct our
      business as it is now conducted. In particular, federal, state and local
      governments have become more active in the consumer protection area in recent
      years. For example, the federal Gramm-Leach-Bliley financial reform legislation
      imposes additional privacy obligations on us with respect to our applicants
      and
      borrowers. The Fair and Accurate Credit Transactions Act of 2003, enacted in
      December 2003, requires us to provide additional disclosures when we disapprove
      a loan application. Additional requirements will apply to our use of consumer
      reports and our furnishing of information to the consumer reporting agencies.
      Additionally, Congress and the Department of Housing and Urban Development
      have
      discussed an intent to reform RESPA. Several states are also considering
      adopting privacy legislation. For example, California has passed legislation
      known as the California Financial Information Privacy Act and the California
      On-Line Privacy Protection Act. Both pieces of legislation became effective
      July
      1, 2004, and impose additional notification obligations on us that are not
      preempted by existing federal law. If other states choose to follow California
      and adopt a variety of inconsistent state privacy legislation, our compliance
      costs could substantially increase. Moreover, several federal, state and local
      laws, rules and regulations have been adopted, or are under consideration,
      that
      are intended to protect consumers from predatory lending. The impact of this
      legislation, should it be adopted in other states, may negatively affect the
      availability of credit to a broader segment of the borrowing population than
      the
      smaller group that the laws are aiming to protect.




Local,
      state and federal legislatures, state and federal banking regulatory agencies,
      state attorneys general offices, the FTC, the Department of Justice, the
      Department of Housing and Urban Development and state and local governmental
      authorities have increased their focus on lending practices by some companies,
      primarily in the non-prime lending industry, sometimes referred to as “predatory
      lending” practices. Sanctions have been imposed by various agencies for
      practices such as charging excessive fees, imposing higher interest rates than
      the credit risk of some borrowers warrant, failing to disclose adequately the
      material terms of loans to borrowers and abrasive servicing and collections
      practices. The Office of the Comptroller of the Currency, the regulator of
      national banks, issued a final regulation in 2004 that prescribed an explicit
      anti-predatory lending standard without regard to a trigger test based on the
      cost of the loan, which prohibits a national bank from, among other
      restrictions, making a loan based predominately on the foreclosure value of
      the
      borrower’s home, rather than the borrower’s repayment ability, including current
      and expected income, current obligations, employment status and relevant
      financial resources. This restriction would prevent national banks and their
      operating subsidiaries from purchasing the variation of the Liberty Loan where
      no assessment is made of the borrower’s ability to repay the loan. In addition,
      if this standard were adopted more generally, it may impact the ability of
      Tribeca to originate the Liberty Loan.




On
      May
      16, 2005, the Office of the Comptroller of the Currency, the Board of Governors
      of the Federal Reserve System, the Federal Deposit Insurance Corporation, the
      Office of Thrift Supervision, and the National Credit Union Administration
      (the
“Agencies”) jointly issued “Credit Risk Management Guidance for Home Equity
      Lending.” The guidance promotes sound credit risk management practices for
      institutions engaged in home equity lending (both home equity lines of credit
      and closed-end home equity loans). Among other risk factors, the Guidance
      cautions lenders to consider all relevant risk factors when establishing product
      offerings and underwriting guidelines, including a borrower’s income and debt
      levels, credit score (if obtained), and credit history, as well as the loan
      size, collateral value, lien position, and property type and location. It
      stresses that prudently underwritten home equity loans should include an
      evaluation of a borrower’s capacity to adequately service the debt, and that
      reliance on a credit score is insufficient because it relies on historical
      financial performance rather than present capacity to pay. While not
      specifically applicable to loans originated by Tribeca, the guidance is
      instructive of the regulatory climate covering low and no documentation loans,
      such as certain of Tribeca’s Liberty Loan products.




27




On
      March
      8, 2007, the Agencies published in the Federal Register for public comment
      a
      proposed statement on subprime mortgage lending to address certain concerns
      of
      the Agencies that subprime borrowers may not fully understand the risk and
      consequences of certain adjustable-rate mortgage products. The Agencies
      expressed particular concern with (1) marketing products to subprime borrowers
      offering low initial payments based on an introductory (“teaser”) rate that is
      considerably lower than the fully indexed rate; (2) approving borrowers without
      considering appropriate documentation of their income; (3) setting very high
      or
      no limits on payment or interest rate increases at reset periods; (4) loan
      product features likely to result in frequent refinancing to maintain an
      affordable monthly payment; (5) including substantial prepayment penalties
      and/or prepayment penalties that extend beyond the initial rate adjustment
      period; and (5) providing borrowers with inadequate information relative to
      product features, material loan terms and products risks.




The
      proposed statement identifies underwriting standards, consumer protection
      principles and control systems applicable to subprime mortgage loans that focus
      on the importance of evaluating the borrower’s ability to repay the debt by its
      final maturity at the fully indexed rate and providing information that enable
      consumers to understand material terms, costs, and risks. The Agencies caution
      their regulated institutions against making mortgage loans based predominately
      on the foreclosure or liquidation value of a borrower’s collateral rather than
      on the borrower’s ability to repay the mortgage according to its terms, inducing
      a borrower to repeatedly refinance a loan in order to charge high points and
      fees each time a loan is refinanced and engaging in fraud or deception to
      conceal the true nature of the mortgage loan obligation. The Agencies also
      advise their regulated institutions that when underwriting higher risk loans,
      stated income and reduced documentation should be accepted only if there are
      mitigating factors that clearly minimize the need for direct verification of
      repayment capacity. A higher interest rate is not considered a mitigating
      factor. While the proposed statement is for financial institutions regulated
      by
      the Agencies, which do not include Franklin Credit or Tribeca, and, in part,
      discusses subprime products not offered by Tribeca such as loans with “teaser”
rates, the proposed statement appears to apply strict standards for all types
      of
      subprime loans and is instructive of the regulatory climate concerning subprime
      mortgage loans, such as Tribeca’s Liberty Loan, where the lending decision is or
      may have been based entirely or primarily on the borrower’s equity in his or her
      home and not, or to a lesser extent, on a determination of the borrower’s
      ability to repay the loan.. In addition, as with the 2006 Interagency Guidance
      on Nontraditional Mortgage Product Risks for mortgages where the borrower is
      able to defer repayment of principal for a period of time (interest only-loans
      and Pay Option ARMS), state regulators may adopt or issue similar standards
      applicable to the institutions they regulate, which includes Tribeca. For
      instance, the Association of Residential Mortgage Regulators, which is comprised
      of state officials with responsibility for regulating state licensed mortgage
      lenders and brokers, has issued a joint press release with the Conference of
      State Bank Supervisors endorsing the proposed statement.




A
      key
      mortgage industry tool for finding new borrowers is under recent attack in
      class
      action litigation across the country. Those class actions have been filed by
      attorneys seeking to capitalize on a 2004 decision of the Seventh Circuit Court
      of Appeals, Cole v. U.S. Capital, Inc. (“Cole”) interpreting the meaning of
“firm offers of credit” under the Fair Credit Reporting Act (“FCRA”). A
      prescreened or firm offer is any offer of credit to a consumer that will be
      honored if the consumer is determined, based on information in a consumer report
      on the consumer, to meet the specific criteria used to select the consumer
      for
      the offer. Cole was the first case in the nation to hold that an offer of
      nominal “value” to the consumer, which could arise from a combination of factors
      such as a low dollar amount of the offered credit, ambiguous or contradictory
      terms, or complex approval procedures, may not actually qualify as a “firm
      offer” under FCRA, even if the stated amount is guaranteed. Recent courts to
      address the issue have split on the issue. Some of the courts in these recent
      cases have concluded that the defendant’s violation of FCRA was “willful.” FCRA
      distinguishes negligent or inadvertent non-compliance from “willful” violations
      by the damages that are available. Specifically, FCRA provides for statutory
      damages of $100-1,000 per violation for “willful” violations and permits
      punitive damages as well. By contrast, FCRA provides that a defendant whose
      non-compliance was merely negligent will be liable only for “actual damages
      sustained by the consumer as a result of the failure.” This distinction is
      significant because FCRA does not have a cap for statutory damages in a class
      action, unlike other federal statutes regulating consumer lending which cap
      statutory damages in a class action at a maximum of $500,000 or one percent
      of
      the creditor’s net worth, whichever is less. If we are named as a defendant in a
      firm offer class action, and the court were to find that the violation was
      willful, we could face substantial liability that could have a material adverse
      affect on our financial condition and operations.




28




HOEPA
      identifies a category of mortgage loans and subjects such loans to restrictions
      not applicable to other mortgage loans. Loans subject to HOEPA consist of loans
      on which certain points and fees or the annual percentage rate, known as the
      APR, exceed specified levels. Liability for violations of applicable law with
      regard to loans subject to HOEPA would extend not only to us, but to the
      institutional purchasers of our loans as well. It is our policy to seek not
      to
      originate loans that are subject to HOEPA or state and local laws discussed
      in
      the following paragraph or purchase high cost loans that violate such laws.
      On
      October 1, 2002, the APR and points and fees thresholds for determining loans
      subject to HOEPA were lowered, thereby expanding the scope of loans subject
      to
      HOEPA. We will continue to avoid originating loans subject to HOEPA, and the
      lowering of the thresholds beyond which loans become subject to HOEPA may
      prevent us from originating certain loans and may cause us to reduce the APR
      or
      the points and fees on loans that we do originate. Non-compliance with HOEPA
      and
      other applicable laws may lead to demands for indemnification or loan
      repurchases from our warehouse lenders and institutional loan purchasers, class
      action lawsuits and administrative enforcement actions.




Laws,
      rules and regulations have been adopted, or are under consideration, at the
      state and local levels that are similar to HOEPA in that they impose certain
      restrictions on loans on which certain points and fees or the APR exceeds
      specified thresholds, which generally are lower than under federal law. These
      restrictions include prohibitions on steering borrowers into loans with high
      interest rates and away from more affordable products, selling unnecessary
      insurance to borrowers, flipping or repeatedly refinancing loans and making
      loans without a reasonable expectation that the borrowers will be able to repay
      the loans. If the numerical thresholds were miscalculated, certain variations
      of
      our Liberty Loan product, where the lending decision is or may have been based
      entirely or primarily on the borrower’s equity in his or her home and not, or to
      a lesser extent, on a determination of the borrower’s ability to repay the loan,
      would violate HOEPA and many of these state and local anti-predatory lending
      laws. In the past, we have sold a portion of our Liberty Loan production to
      third parties on a whole-loan, servicing-released basis. Going forward, however,
      our ability to finance the origination of Liberty Loans or sell the Liberty
      Loan
      product to third parties could be impaired if our sources of financing or
      mortgage investors are required or choose to incorporate prohibitions from
      certain anti-predatory lending practices into their eligibility criteria, even
      if the laws themselves do not specifically apply to us. Compliance with some
      of
      these restrictions requires lenders to make subjective judgments, such as
      whether a loan will provide a “net tangible benefit” to the borrower. These
      restrictions expose a lender to risks of litigation and regulatory sanction
      no
      matter how carefully a loan is underwritten. The remedies for violations of
      these laws are not based on actual harm to the consumer and can result in
      damages that exceed the loan balance. In addition, an increasing number of
      these
      laws, rules and regulations seek to impose liability for violations on
      assignees, which may include our warehouse lenders and whole-loan buyers,
      regardless of whether the assignee knew of or participated in the
      violation.




The
      continued enactment of these laws, rules and regulations may prevent us from
      originating certain loans and may cause us to reduce the interest rate or the
      points and fees on loans that we do originate. We may decide to originate a
      loan
      that is covered by one of these laws, rules or regulations only if, in our
      judgment, the loan is made in accordance with our strict legal compliance
      standards and without undue risk relative to litigation or to the enforcement
      of
      the loan according to its terms. If we decide to relax our self-imposed
      restrictions on originating loans subject to these laws, rules and regulations,
      we will be subject to greater risks for actual or perceived non-compliance
      with
      the laws, rules and regulations, including demands for indemnification or loan
      repurchases from the parties to whom we broker or sell loans, class action
      lawsuits, increased defenses to foreclosure of individual loans in default,
      individual claims for significant monetary damages, and administrative
      enforcement actions. In addition, the difficulty of managing the risks presented
      by these laws, rules and regulations may decrease the availability of warehouse
      financing and the overall demand for non-prime loans, making it difficult to
      fund or sell any of our loans. If nothing else, the growing number of these
      laws, rules and regulations will increase our cost of doing business as we
      are
      required to develop systems and procedures to ensure that we do not violate
      any
      aspect of these new requirements.




29




A
      portion
      of our mortgage loans are originated through independent mortgage brokers.
      Mortgage brokers provide valuable services in the loan origination process
      and
      are compensated for their services by receiving fees on loans. Brokers may
      be
      paid by the borrower, the lender or both. If a borrower cannot or does not
      want
      to pay the mortgage broker’s fees directly, the loan can be structured so that
      the mortgage broker’s fees are paid from the proceeds of the loan, or the loan
      can provide for a higher interest rate or higher fees to the lender. Regardless
      of the manner in which a broker is compensated, the payment is intended only
      to
      compensate the broker for the services actually performed and the facilities
      actually provided.




RESPA
      prohibits the payment of fees for the mere referral of real estate settlement
      service business. This law does permit the payment of reasonable value for
      services actually performed and facilities actually provided unrelated to the
      referral. In the past, several lawsuits have been filed against mortgage lenders
      alleging that such lenders have made certain payments to independent mortgage
      brokers in violation of RESPA. These lawsuits generally have been filed on
      behalf of a purported nationwide class of borrowers alleging that payments
      made
      by a lender to a broker in addition to payments made by the borrower to a broker
      are prohibited by RESPA and are therefore illegal. On September 18, 2002, the
      Eleventh Circuit Court of Appeals issued a decision in Heimmermann v. First
      Union Mortgage Corp., which reversed the court’s earlier decision in Culpepper
      v. Irwin Mortgage Corp. in which the court found the yield spread premium
      payments received by a mortgage broker to be unlawful per se under RESPA. The
      Department of Housing and Urban Development responded to the Culpepper decision
      by issuing a policy statement (2001-1) taking the position that lender payments
      to mortgage brokers, including yield spread premiums, are not per se illegal.
      The Heimmermann decision eliminated a conflict that had arisen between the
      Eleventh Circuit and the Eighth and Ninth Circuit Courts of Appeals, with the
      result that all federal circuit courts that have considered the issue have
      aligned with the Department of Housing and Urban Development policy statement
      and found that yield spread premiums are not prohibited per se. If other circuit
      courts that have not yet reviewed this issue disagree with the Heimmermann
      decision, there could be a substantial increase in litigation regarding lender
      payments to brokers and in the potential costs of defending these types of
      claims and in paying any judgments that might result. Although we believe that
      our broker compensation programs comply with all applicable laws and are
      consistent with long-standing industry practice and regulatory interpretations,
      in the future new regulatory interpretations or judicial decisions may require
      us to change our broker compensation practices. Such a change may have a
      material adverse effect on us and the entire mortgage lending
      industry.




**Compliance,
      Quality Control and Quality Assurance**




We
      maintain a variety of quality control procedures designed to detect compliance
      errors prior to funding. We have a stated anti-predatory lending policy which
      is
      communicated to all employees at regular training sessions. In addition,
      Tribeca, from time to time, subjects a statistical sampling of our loans to
      post-funding quality assurance reviews and analysis. We track the results of
      the
      quality assurance reviews and report them back to the responsible origination
      units. Our loans and practices are reviewed regularly in connection with the
      due
      diligence that our loan buyers and lenders perform. State regulators also review
      our practices and loan files and report the results back to us.




30




***Privacy***




The
      federal Gramm-Leach-Bliley Act obligates us to safeguard the information we
      maintain on our borrowers. California has passed legislation known as the
      California Financial Information Privacy Act and the California On-Line Privacy
      Protection Act. Both pieces of legislation became effective on July 1, 2004,
      and
      impose additional notification obligations on us that are not pre-empted by
      existing federal law. Regulations have been proposed by several agencies and
      states that may affect our obligations to safeguard information. If other states
      or federal agencies adopt additional privacy legislation, our compliance costs
      could substantially increase.




***Fair
      Credit Reporting Act***




The
      Fair
      Credit Reporting Act provides federal preemption for lenders to share
      information with affiliates and certain third parties and to provide
      pre-approved offers of credit to consumers. Congress also amended the Fair
      Credit Reporting Act to place further restrictions on the use of information
      shared between affiliates, to provide new disclosures to consumers when risk
      based pricing is used in the credit decision, and to help protect consumers
      from
      identity theft. All of these new provisions impose additional regulatory and
      compliance costs on us and reduce the effectiveness of our marketing
      programs.




As
      discussed above under the heading “New Areas of Regulation,” there has been
      significant class action activity relating to prescreened offers of credit,
      which is a tool we and many other mortgage lenders use for finding new
      borrowers. We have not been named as a defendant in such a class action.
      However, if we were to be named in a class action alleging a violation of the
      Fair Credit Reporting Act’s prescreened offer provisions, and the court were to
      find that the violation was willful, we could face substantial liability that
      could have a material adverse affect on our financial condition and
      operations.




***Home
      Mortgage Disclosure Act***




In
      2002,
      the Federal Reserve Board adopted changes to Regulation C promulgated under
      the
      Home Mortgage Disclosure Act. Among other things, the new regulations require
      lenders to report pricing data on loans that they originate with annual
      percentage rates that exceed the yield on treasury bills with comparable
      maturities by three percent. The expanded reporting took effect in 2004 for
      reports filed in 2005. A majority of our loans are subject to the expanded
      reporting requirements.




The
      expanded reporting does not provide for additional loan information such as
      credit risk, debt-to-income ratio, LTV ratio, documentation level or other
      salient loan features that might impact pricing on individual loans. As a
      result, the reported information may lead to increased litigation and government
      scrutiny to determine if any reported disparities between prices paid by
      minorities and majorities may have resulted from unlawful discrimination. For
      example, the Civil Rights Division of the New York State Attorney General’s
      office has requested that certain large lenders provide it with supplementary
      information to explain the disparities in their reported HMDA data.




***Telephone
      Consumer Protection Act and Telemarketing Consumer Fraud and Abuse Prevention
      Act***




The
      FCC
      and the FTC adopted “do-not-call” registry requirements, which, in part, mandate
      that companies such as us maintain and regularly update lists of consumers
      who
      have chosen not to be called. These requirements also mandate that we do not
      call consumers who have chosen to be on the list. Those prohibitions do not
      apply to calls made to a servicer’s existing customers. Several states have also
      adopted similar laws, with which we also seek to comply.




31




**Environmental
      Matters**




In
      the
      ordinary course of our business we have from time to time acquired, and we
      may
      continue to acquire in the future, properties securing loans that are in
      default. In addition, loans that we purchase that are initially not in default
      may subsequently be defaulted on by the borrower. In either case, it is possible
      that hazardous substances or waste, contamination, pollutants or sources thereof
      could be discovered on those properties after we acquire them. To date, we
      have
      not incurred any environmental liabilities in connection with our OREO, although
      there can be no guarantee that we will not incur any such liabilities in the
      future .




**Employees**




We
      recruit, hire, and retain individuals with the specific skills that complement
      our corporate growth and business strategies. As of December 31, 2006, we had
      232 full time employees, of which 78 were employed by Tribeca, our origination
      subsidiary.




None
      of
      our employees are represented by a union or covered by a collective bargaining
      agreement. We believe our relations with our employees are good.




**ITEM
      1A.****RISK
      FACTORS**




**Risks
      Related to Our Business**




***If
      we are not able to identify and acquire portfolios of “scratch and dent”
residential mortgage loans on terms acceptable to us, our revenues and
      profitability could be materially reduced.***




Our
      success depends upon the continued availability of portfolios of scratch and
      dent loans, or S&D loans, that meet our purchasing criteria, and our ability
      to identify and successfully bid to acquire such portfolios. The availability
      of
      such portfolios at favorable prices and on terms acceptable to us depends on
      a
      number of factors outside of our control, including:


·
              general
                  conditions in the U.S. and regional
                  economies;
  ·
              interest
                  rates;
  ·
              the
                  demand for residential real estate purchases, refinancing or home
                  equity
                  lines of credit;
  ·
              real
                  estate values;
  ·
              underwriting
                  criteria used by originators;
  ·
              the
                  prices other acquirers are willing to
                  pay;
  ·
              the
                  securitization market; and
  ·
              laws
                  and regulations governing consumer
                  lending.




Significant
      changes in any of these factors could affect the availability and/or the cost
      for us to acquire S&D loans. Any increase in the prices we are required to
      pay for such loans in turn will reduce the profit, if any, we generate from
      these assets. We cannot predict our future acquisition volume or our ability
      to
      submit successful bids to purchase portfolios of S&D loans and we cannot
      guarantee that we will be able to purchase these assets at the same volume
      or
      with the same yields as we have historically purchased. Our acquisition volume
      has in the past varied substantially from quarter to quarter, and we expect
      that
      it will continue to fluctuate in the future. As a result of our business
      strategy of purchasing pools of mortgage loans and the volatility of such
      purchases in both amount and timing, our quarter-to-quarter and year-to-year
      net
      income may be more volatile than those of other financial services companies.
      If
      the volume of S&D loans purchased declines or the yields of those assets
      decline, we could experience a material decrease in revenues and
      profitability.




32




***We
      may not be able to successfully market our residential mortgage loan origination
      products to non-prime borrowers.***




The
      success of the loan origination business of our wholly-owned subsidiary, Tribeca
      Lending Corp., depends on our ability to market Tribeca’s loan origination
      products to subprime borrowers seeking to obtain residential mortgage loans.
      Adverse changes in the U.S. economy or the real estate market could result
      in a
      decrease in borrowing activity generally, as well as an increase in competition
      for subprime borrowers among loan originators, which could reduce the number
      of
      loans Tribeca is able to originate. A prolonged or exacerbated decline in
      housing prices nationwide or in the principal geographic markets where Tribeca
      originates loans could reduce the overall number of borrowers that meet the
      loan-to-value ratio qualifications for its Liberty Loan products. Further,
      changes in the regulatory environment that result in our adopting more demanding
      underwriting standards or documentation requirements or other increased
      restrictions on loans to subprime borrowers, or the perception that such changes
      are likely, may also reduce the number of loans Tribeca is able to originate.
      A
      reduction in Tribeca’s origination business would curtail the growth of the
      number of loans in our portfolio from which we generate revenue through interest
      and fee income, loan sales and servicing, which could negatively affect our
      revenues and financial condition.




***Our
      business is dependent on external financing, and we currently receive the
      substantial majority of our financing from a single lender. If our principal
      lender ceases to provide financing to us or increases the cost to us of such
      financing and we are unable to access alternative external sources of financing
      on favorable terms or at all, we would not be able to fund and grow our
      operations and our business will be materially
      harmed.***




We
      currently receive a substantial majority of our external financing from our
      principal lender, Sky Bank, under a series of credit facilities, including
      our
      master credit facility, Tribeca’s warehouse credit and security agreement, or
      warehouse facility, and Tribeca’s master credit and security agreement. If we
      lose access to this primary source of external financing for any reason, we
      will
      not have the liquidity to fund our business operations.




We
      depend
      on our credit facilities to:




·
            provide
                the cash necessary to fund our acquisition of S&D
                loans;




·
            fund
                our loan originations; and




·
            enable
                us to hold our loans for investment or pending
                sale.




Our
      credit facilities do not obligate our principal lender to make any additional
      credit available to us. Accordingly, there is no guarantee that we will continue
      to receive additional financing under our current agreements or that our
      principal lender will enter into new agreements with us upon the expiration
      of
      the current agreements on terms favorable to us or at all. If our principal
      lender, or our participating banks refuse to extend additional credit to us
      for
      any reason, including, for example, a change in policies, management or control,
      reaching a maximum lending amount to one borrower, a change in its criteria
      for
      eligible mortgage loans to secure credit advances, a change in the regulatory
      environment, including a change in the financing of mortgage loans where the
      lending decision is based entirely or primarily on the borrower’s equity in his
      or her home and not, or to a lesser extent, on a determination of the borrower’s
      ability to repay the loan, or a lack of available funds, a change in our
      financial condition, for example, our capital/assets ratio or debt/equity ratio,
      or operating results, or a severe decline in the housing, mortgage or subprime
      mortgage markets, we would need to secure comparable financing from the other
      banks currently participating with our principal lender and/or other sources
      in
      order to continue to fund our acquisition and origination activities and
      possibly working capital. In addition, we may not be able to secure additional
      fundings from our lender within the time period necessary to capitalize on
      special opportunities in the marketplace that may become available from time
      to
      time. There is no guarantee that, in such an event, we would be able to secure
      other external financing on favorable terms or at all.




33




Even
      if
      our principal lender does agree to provide additional financing to us, there
      is
      no guarantee that such financing will be on terms as favorable as our current
      facilities. Our ability to be competitive in both portfolio acquisitions and
      loan originations depends on the cost of our financing, and any new facility
      could bear interest at higher rates than we currently pay. Such an increase
      in
      our cost of funds would adversely affect our ability to bid competitively for
      portfolio acquisitions and profitably originate loans, which in turn would
      have
      an adverse effect on our business prospects and financial
      condition.




***The
      pending merger of our principal lender, Sky Bank, with Huntington Bancshares
      Inc., could harm our ability to borrow funds to support our
      business.***




In
      December 2006, Sky Bank announced a pending merger with Huntington Bancshares
      Inc. The merger is expected to close in the third quarter of 2007, subject
      to
      regulatory and stockholder approvals, and is expected to result in a combined
      $54 billion bank in total assets. The combined bank will be the successor to
      our
      credit facilities currently provided by Sky, and we believe that the combined
      bank will continue our banking relationship and continue to meet the Company’s
      financing needs. However, there is no guarantee the merged bank will continue
      to
      provide financing on the same or more favorable terms or at all.




***Our
      ability to fund increased operating expenses depends on the agreement of our
      principal lender to increases in our operating
      allowance.***




Under
      our
      credit facilities with our lenders, we are required to submit all payments
      we
      receive from obligors under pledged mortgage loans to a lockbox maintained
      by
      our principal lender, from which we receive an operating allowance, which is
      renegotiated from time to time and at least annually, to sustain our business.
      All amounts submitted to the lockbox in excess of the agreed upon operating
      allowance are used to pay down amounts outstanding under our credit facilities
      with our lenders. The operating allowance may not be sufficient to meet our
      liquidity needs in the future, particularly as we seek to grow our operations.
      If it is insufficient, there is no guarantee that our principal lender will
      increase our operating allowance, which would have a material adverse impact
      on
      our business.




***If
      our principal lender ceases to renew our maturing loans for additional terms
      or
      provide us with refinancing opportunities, or we are unable to secure
      refinancing opportunities with other lenders, our indebtedness will become
      due
      and payable upon the contractual maturity of each
      borrowing.***




The
      unpaid principal balance of each loan under our various credit facilities with
      our principal lender is amortized over a twenty-year period, but matures three
      years after the date the loan was made. Historically, our principal lender
      has
      routinely agreed to renew such loans for additional three-year terms upon their
      maturity. Similarly, advances under Tribeca’s warehouse facility are required to
      be repaid within 120 days after the date of advance (or, in some cases,
      earlier). Our principal lender has historically allowed us to convert our
      indebtedness under the warehouse facility to term loans outside the warehouse
      facility, and has provided us with consolidation and refinancing opportunities.
      There is no guarantee that our principal lender will continue to renew our
      loans
      under the term loan agreements or provide us with opportunities to consolidate,
      refinance or convert our borrowings under the warehouse facility, thereby
      relieving our immediate repayment obligations. Our principal lender’s refusal to
      provide us with such renewal, conversion, consolidation and refinancing
      opportunities could cause our indebtedness to become immediately due and payable
      upon the contractual maturity of such indebtedness, which could result in our
      insolvency if we are unable to refinance our debt through alternative lenders
      or
      other financing vehicles and preclude us from further borrowings. There is
      no
      guarantee that we would be able to refinance our debt through alternative
      lenders on favorable terms or at all because we are highly leveraged and our
      ratio of equity to assets and/or our ratio of debt to equity may not be
      sufficient to support traditional borrowing.




34




***Our
      credit facilities require us to observe certain covenants, and our failure
      to
      satisfy such covenants could render us insolvent or preclude our seeking
      additional financing from this or other sources.***




Our
      credit facilities require us to observe certain affirmative, negative and
      financial covenants customary for financings of this type, including: a covenant
      under our master credit facility with our principal lender requiring that we
      and
      our subsidiaries maintain a minimum consolidated net worth of at least $10.0
      million; a covenant under Tribeca’s master credit and warehouse facilities with
      our principal lender requiring that Tribeca and its subsidiaries maintain a
      consolidated minimum net worth of at least $3.5 million and rolling four-quarter
      pre-tax net income of $750,000. Failure to satisfy any of these covenants
      could:




·
            cause
                our indebtedness to become immediately payable, which could result
                in our
                insolvency if we are unable to repay our debt;
                and




·
            preclude
                us from further borrowings.




In
      addition, under our master credit facility with our principal lender, Thomas
      J.
      Axon, our Chairman and President, ceasing to possess, directly or indirectly,
      the power to direct our management and policies through his ownership of our
      voting stock constitutes an event of default, which, without a waiver from
      our
      principal lender, would cause our indebtedness to become immediately payable
      and
      could result in our insolvency if we are unable to repay our debt.




***Our
      business is sensitive to, and can be materially affected by, changes in interest
      rates.***




Our
      business may be adversely affected by changes in interest rates, particularly
      changes that are unexpected in timing or size. The following are some of the
      risks we face related to an increase in interest rates:




·
            All
                of our borrowings bear interest at variable rates, while a significant
                majority of the loans in our portfolio have fixed rates. As a result,
                an
                increase in rates is likely to result in an increase in our interest
                expense without an offsetting increase in interest income. Further,
                our
                adjustable-rate loans typically provide for less frequent adjustments
                in
                response to rate increases than do our borrowings, and sometimes
                also
                include interest rate caps. To the extent this is the case, an increase
                in
                interest rates would result in a greater increase in our interest
                expense
                than in our interest income, which would adversely affect our
                profitability.




·
            An
                increase in interest rates would adversely affect the value that
                we would
                receive upon a sale of loans that bear interest at fixed rates, and
                our
                results of operations could be adversely
                affected.




·
            An
                increase in our funding costs without an offsetting increase in revenue
                would cause our cash flow to decrease, which in turn may have an
                adverse
                impact on our ability to meet our monthly debt service obligations.
                In the
                event we are unable to meet our monthly debt service obligations
                for this
                or for any other reason, we would be in default under the obligations
                of
                our credit facilities and our lenders would have the right to accelerate
                payments under our credit
                facilities.




35




·
            A
                substantial and sustained increase in interest rates could harm Tribeca’s
                loan origination volume because refinancings of existing loans, including
                cash-out refinancings and interest rate-driven refinancings, would
                be less
                attractive and qualifying for a purchase loan may be more difficult.
                Lower
                origination volume may harm our earnings by reducing origination
                income,
                net interest income, prepayment and other servicing fees and gain
                on sale
                of loans.




·
            An
                increase in interest rates would result in a slowdown of borrower
                prepayments and a reduction of revenue as purchase discount accreted
                into
                income would decline. An increase in interest rates may also lead
                to an
                increase in our borrower defaults, if borrowers have difficulties
                making
                their adjustable-rate mortgage payments, and a corresponding increase
                in
                nonperforming assets, which could decrease our revenues and our cash
                flows, increase our loan servicing costs and our provision for loan
                losses, and adversely affect our
                profitability.




We
      are
      also subject to risks from decreasing interest rates. For example, a significant
      decrease in interest rates could increase the rate at which loans are prepaid
      and reduce our interest income in subsequent periods.




Historically,
      we have not hedged against changes in interest rates because we determined
      that
      the costs associated with establishing hedging strategies outweighed the
      potential benefits. Our lack of hedges means that we have had greater exposure
      to interest rate volatility, particularly as a result of increases in short-term
      interest rates, than we would have had if we were able to successfully employ
      hedging strategies. In August 2006, we entered into LIBOR interest-rate cap
      agreements to hedge portions of the Company’s interest-sensitive term debt
      against future increases in short-term interest rates should they rise above
      certain levels. We cannot offer any assurance that these cap agreements will
      effectively offset a rise in short-term interest rates. (See “Liquidity and
      Capital Resources - Borrowings - Interest Rate Caps.”)




***A
      prolonged economic slowdown or a lengthy or severe recession could harm our
      operations, particularly if it results in a decline in the real estate
      market.***




The
      risks
      associated with our business are more acute during periods of economic slowdown
      or recession because these periods may be accompanied by decreased demand for
      mortgage loans and decreased real estate values, as well as an increased rate
      of
      delinquencies, defaults and foreclosures. In particular, any material decline
      in
      real estate values would increase the loan-to-value ratios on loans that we
      hold
      and, therefore, weaken our collateral coverage, increase the likelihood of
      a
      borrower with little or no equity in his or her home defaulting and increase
      the
      possibility of a loss if a borrower defaults.




***The
      residential mortgage origination business is a cyclical industry, has recently
      reached its highest levels ever and has begun to decline in 2006, which could
      reduce the number of mortgage loans we originate and could adversely impact
      our
      business.***




The
      residential mortgage origination business has historically been a cyclical
      industry, enjoying periods of strong growth and profitability followed by
      periods of shrinking volumes and reduced profits. The residential mortgage
      industry has experienced rapid growth over the past several years due to
      interest rates that are low by historical standards and various other factors.
      During the past several months, the residential real estate market generally
      has
      been in decline, with home values declining and originations slowing, and severe
      difficulties surfacing in the subprime origination sector. As a result, various
      industry associations and economists have predicted that residential mortgage
      originations, particularly subprime originations, will decrease in 2007 due
      to
      these changing housing and origination market conditions. We expect this to
      result in a decreased volume of industry-wide originations, particularly
      non-prime originations, in the foreseeable future. Due to the strong housing
      market and decreasing and stable interest rates over recent years, our
      historical loan origination performance may not be indicative of results in
      a
      declining home value or rising interest rate environment, and our results of
      operations may be materially adversely affected if interest rates continue
      to
      rise or home values continue to decline.




36




***Our
      reliance on cash-out refinancings as a significant source of our origination
      activities increases the risk that our earnings will be harmed if the demand
      for
      this type of refinancing declines.***




Our
      loan
      origination volume is comprised principally of cash-out refinancings. This
      concentration increases the risk that our earnings will be reduced if interest
      rates rise and/or the prices of homes decline, which would reduce the demand
      and
      our origination volume for this type of refinancing. Such a reduction could
      harm
      our results of operations, financial condition and business
      prospects.




***When
      we acquire S&D loans, the price we pay is based on a number of assumptions.
      A material difference between the assumptions we use in determining the value
      of
      S&D loans we acquire and our actual experience could harm our financial
      position.***




The
      purchase price and carrying value of the S&D loans we acquire is determined
      largely by estimating expected future cash flows from such loans based on the
      delinquency, loss, prepayment speed and discount rate assumptions we use. If
      the
      amount and timing of actual cash flows are materially different from our
      estimates, our cash flow and profitability would be materially adversely
      affected and we could be required to record write-downs that could adversely
      affect our financial condition.




***We
      may experience higher loan losses than we have reserved for in our financial
      statements.***




Our
      loan
      losses could exceed the allowance for loan losses that we have reserved for
      in
      our financial statements. Reliance on historic loan loss experience may not
      be
      indicative of future loan losses. Regardless of the underwriting criteria we
      utilize, losses may be experienced as a result of various factors beyond our
      control, including, among other things, changes in market conditions affecting
      the value of our loan collateral and problems affecting the credit and business
      of our borrowers.




***We
      use estimates for recognizing revenue on a majority of our portfolio investments
      and our earnings would be reduced if actual results are less than our
      estimates.***




We
      recognize income from the purchase discount on our portfolio of notes receivable
      using the interest method. We use this method only if we can reasonably estimate
      the expected amount and timing of cash to be collected based on historic
      experience and other factors. We reevaluate estimated future cash flows
      quarterly. If future cash collections are less than what we estimated they
      would
      be, we would recognize less than anticipated purchase discount, which would
      reduce our earnings.




***If
      we do not manage our growth effectively, our financial performance could be
      harmed.***




In
      recent
      years, we have experienced rapid growth that has placed, and will continue
      to
      place, certain pressures on our infrastructure. We will need to continue to
      upgrade and expand our financial, operational, administrative and managerial
      systems and controls. Further, continued growth could require capital resources
      beyond what we currently possess. In particular, our acquisition and servicing
      of large “bulk” portfolios relative to our size, our origination volume and our
      creation of new product lines, such as our Liberty Loan product, require a
      significant amount of financial, operational and administrative resources.
      As a
      result, we may not able to support such bulk purchases, origination volume
      and
      new product lines without corresponding increases in our general and
      administrative costs. If we do not manage our growth effectively, our expenses
      could increase and our business, liquidity and financial condition could be
      significantly harmed.





37





***The
      inability to attract and retain qualified employees could significantly harm
      our
      business.***




We
      continually need to attract, hire and successfully integrate additional
      qualified personnel in an intensely competitive hiring environment in order
      to
      manage and operate our growing business. The market for skilled acquisitions
      management, account executives and loan officers is highly competitive and
      employers have historically experienced a high rate of turnover. Competition
      for
      qualified personnel may lead to increased hiring and retention costs. If we
      are
      unable to attract, successfully integrate and retain a sufficient number of
      skilled personnel at manageable costs, we will be unable to continue to acquire,
      originate and service mortgage loans, which would harm our business, results
      of
      operations and financial condition.




***We
      may have to outsource a portion of the servicing of the loans we hold due to
      capacity constraints or lack of sufficient personnel.***




We
      require sufficient qualified personnel to service the loans that we hold. On
      occasion, due to capacity constraints or lack of personnel, we temporarily
      outsource the servicing of a newly acquired portfolio to a qualified third-party
      servicer under a sub-servicing agreement. In our experience, a high quality
      of
      servicing often has a positive effect on lowering delinquency and default rates.
      To the extent that we deem it necessary to outsource the servicing of a portion
      of our loans, we cannot guarantee that the servicing performed by the contracted
      sub-servicers is at the same level that we would typically perform or that
      the
      cash flows realized from the sub-serviced loans will be as good as those we
      had
      projected in pricing the acquisition of such loans or realized from otherwise
      similar loans in our portfolio that we service.




***We
      face intense competition that could adversely impact our market share and our
      revenues.***




We
      face
      intense competition in our loan acquisition and loan origination business from
      other specialty finance companies, finance and mortgage banking companies,
      internet-based lending companies and, to a growing extent, from traditional
      bank
      and thrift lenders, and most recently, large Wall Street banking firms that
      have
      been entering the non-prime mortgage industry. Some of our competitors are
      much
      larger than we are, have better name recognition than we do, and have far
      greater financial and other resources than us. Many of our competitors have
      superior access to capital sources and can arrange or obtain lower costs of
      financing, resulting in a competitive disadvantage to us with respect to such
      competitors.




Competition
      in our industry can take many forms, including the price and other terms of
      bids
      for portfolio acquisitions, the speed with which acquisitions can be completed,
      interest rates and costs of a loan, stringency of underwriting standards,
      customer service, amount and term of a loan, and marketing and distribution
      channels. The need to maintain mortgage loan volume in this competitive
      environment creates a risk of price competition and may result in increased
      purchase prices and reduced profitability, potentially to such an extent that
      we
      believe that prices in the market are not supported by the fundamentals. In
      addition, price competition could cause us to lower the interest rates on loans
      originated by Tribeca, which could lower the value of our loans. Any increase
      in
      these pricing and underwriting pressures could reduce the volume of our loan
      acquisitions and originations and significantly harm our business, results
      of
      operations, liquidity and financial condition.




***A
      significant amount of our mortgage loan originations are secured by property
      in
      New York and New Jersey, and our operations could be harmed by economic
      downturns or other adverse events in these states.***




A
      significant portion of Tribeca’s mortgage loan origination activity is
      concentrated in the northeastern United States, particularly in New York and
      New
      Jersey. Of the loans originated by Tribeca and held for investment as of
      December 31, 2006, a substantial majority of the aggregate principal was secured
      by property in these two states. An overall decline in the economy or the
      residential real estate market, a continuing decline in home prices, the
      occurrence of events such as a natural disaster or an act of terrorism in the
      northeastern United States could decrease the value of residential properties
      in
      this region. This could result in an increase in the risk of delinquency,
      default or foreclosure on mortgage loans in our portfolio and restrict Tribeca’s
      ability to originate new mortgage loans, each of which could reduce our
      revenues, increase our expenses and reduce our profitability.




38




***Competition
      with other lenders for the business of independent mortgage brokers could
      negatively affect the volume and pricing of our originated
      loans.***




We
      depend
      in large measure on independent mortgage brokers to source our Liberty Loan
      product, which currently constitutes the majority of Tribeca’s loan production.
      These independent mortgage brokers have relationships with multiple lenders
      and
      are not obligated by contract or otherwise to do business with us. We compete
      with other lenders for independent brokers’ business on pricing, service and
      other factors. Such competition could negatively affect the volume, quality
      and
      pricing of our loans, which could harm our revenues and
      profitability.




***We
      may not be adequately protected against the risks inherent in subprime
      residential mortgage loans.***




The
      vast
      majority of the loans we originate are underwritten generally in accordance
      with
      standards designed for subprime residential mortgages. Mortgage loans
      underwritten under these underwriting standards are likely to experience rates
      of delinquency, foreclosure and loss that are higher, and may be substantially
      higher, than prime residential mortgage loans. A majority of the loans
      originated to date by Tribeca were made under a “limited documentation” program,
      which generally places the most significant emphasis on the loan-to-value ratio
      based on the appraised value of the property, and not, or to a lesser extent,
      on
      a determination of the borrower’s ability to repay the loan. We cannot be
      certain that our underwriting and loan servicing practices will afford adequate
      protection against the higher risks associated with loans made to such
      borrowers. If we are unable to mitigate these risks, our cash flows, results
      of
      operations, financial condition and liquidity could be materially
      harmed.




***We
      are subject to losses due to fraudulent and negligent acts on the part of loan
      applicants, mortgage brokers, sellers of loans we acquire, vendors and our
      employees.***




When
      we
      acquire and originate mortgage loans, we typically rely heavily upon information
      supplied by third parties, including the information contained in the loan
      application, property appraisal, title information and, in some cases,
      employment and income stated on the loan application. If any of this information
      is intentionally or negligently misrepresented and such misrepresentation is
      not
      detected prior to the acquisition or funding of the loan, the value of the
      loan
      may be significantly lower than expected. Whether a misrepresentation is made
      by
      the loan applicant, the mortgage broker, another third party or one of our
      employees, we generally bear the risk of loss associated with the
      misrepresentation except when we purchase loans pursuant to contracts that
      include a right of return and the seller remains sufficiently creditworthy
      to
      render such right meaningful.




***An
      interruption in or breach of our information systems may result in lost business
      and increased expenses.***




We
      rely
      heavily upon communications and information systems to conduct our business.
      Any
      failure, interruption or breach in security of or damage to our information
      systems or the third-party information systems on which we rely could cause
      delays in performing due diligence, pricing, servicing and underwriting our
      loans. This could result in increased difficulty in effectively identifying,
      evaluating and pricing loan portfolios available for purchase, fewer loan
      applications being received, slower processing of applications, increased
      expenses and reduced efficiency in loan servicing. In addition, we are required
      to comply with significant federal and state regulations relating to the
      handling of customer information, particularly with respect to maintaining
      the
      confidentiality of such information. A failure, interruption or breach of our
      information systems could result in regulatory action and litigation against
      us.
      We cannot assure you that such failures or interruptions will not occur or
      if
      they do occur that they will be adequately addressed by us or the third parties
      on which we rely.




39




***The
      success and growth of our business will depend on our ability to adapt to and
      implement technological changes to remain competitive, and any failure to do
      so
      could result in a material adverse effect on our
      business.***




Our
      mortgage loan acquisition, origination and servicing businesses are dependent
      upon our ability to effectively interface with our sellers, brokers, borrowers
      and other third parties and to efficiently process loan purchases, applications
      and closings. Technological advances, such as the ability to automate loan
      servicing, process applications over the Internet, accept electronic signatures
      and provide instant status updates, are playing an increasing role in our
      ability to effectively interact with these third parties. The intense
      competition in our industry has led to rapid technological developments,
      evolving industry standards and frequent releases of new products and
      enhancements. The failure to acquire new technologies or technological solutions
      when necessary could limit our ability to remain competitive in our industry
      and
      our ability to increase the cost-efficiencies of our operating model, which
      would harm our business, results of operations and financial condition.
      Alternatively, adapting to technological changes in the industry to remain
      competitive may require us to make significant and costly changes to our loan
      origination and information systems, which could in turn reduce our
      profitability.




***We
      are exposed to the risk of environmental liabilities with respect to properties
      to which we take title.***




In
      the
      course of our business, we may foreclose on defaulted mortgage loans and take
      title to the properties underlying those mortgages. If we do take title, we
      could be subject to environmental liabilities with respect to these properties.
      Hazardous substances or wastes, contaminants, pollutants or sources thereof
      may
      be discovered on these properties during our ownership or after a sale to a
      third party. Environmental defects can reduce the value of and make it more
      difficult to sell such properties, and we may be held liable to a governmental
      entity or to third parties for property damage, personal injury, investigation,
      and cleanup costs incurred by these parties in connection with environmental
      contamination, or may be required to investigate or clean up hazardous or toxic
      substances or chemical releases at a property. These costs could be substantial.
      If we ever become subject to significant environmental liabilities, our
      business, financial condition, liquidity and results of operation could be
      materially and adversely affected. Although we have not to date incurred any
      environmental liabilities in connection with our real estate owned, there can
      be
      no guarantee that we will not incur any such liabilities in the
      future.




***The
      loss of our Chairman may adversely affect our
      operations.***




Thomas
      J.
      Axon, our Chairman and President, is responsible for making substantially all
      of
      the most significant policy and managerial decisions in our business operations,
      including determining which large bulk mortgage portfolios to purchase, the
      purchase price and other material terms of such portfolio acquisitions. These
      decisions are paramount to the success and growth of our business. Mr. Axon
      is
      also instrumental in securing our external financing. The loss of the services
      of Mr. Axon could disrupt our operations and adversely affect our ability to
      successfully finance, acquire and service mortgage portfolios, which would
      harm
      the prospects of our business.




***If
      we do not obtain and maintain the appropriate state licenses we will not be
      allowed to originate, purchase and service mortgage loans in some states, which
      would adversely affect our operations.***




State
      mortgage finance licensing laws vary considerably. Most states and the District
      of Columbia impose a licensing obligation to originate first and/or subordinate
      residential mortgage loans. In some of the states that impose a licensing
      obligation to originate residential mortgage loans, the licensing obligation
      also arises to purchase closed mortgage loans. Many of those mortgage licensing
      laws impose a licensing obligation to service residential mortgage loans.
      Certain state collection agency licensing laws require entities collecting
      on
      delinquent or defaulted loans for others or to acquire such loans to be
      licensed. If we are unable to obtain and maintain the appropriate state licenses
      or do not qualify for an exemption, our operations may be adversely
      affected.




40




**Risks
      Related to the Restatement of Our Financial Statements**




***We
      may become subject to liability and incur increased expenditures as a result
      of
      our restatement of our financial statements.***




The
      restatement of our previously issued financial statements could expose us to
      government investigation or legal action. The defense of any such actions could
      cause the diversion of management’s attention and resources, and we could be
      required to pay damages to settle such actions or if any such actions are not
      resolved in our favor. Even if resolved in our favor, such actions could cause
      us to incur significant legal and other expenses. Moreover, we may be the
      subject of negative publicity focusing on the financial statement inaccuracies
      and resulting restatement and negative reactions from shareholders, creditors,
      or others with which we do business. The occurrence of any of the foregoing
      could harm our business and reputation and cause the price of our securities
      to
      decline.




***Failures
      in our internal controls and disclosure controls and procedures could lead
      to
      material errors in our financial statements and cause us to fail to meet our
      reporting obligations.***




Effective
      internal controls are necessary for us to provide reliable financial reports.
      Such controls are designed to provide reasonable, not absolute assurance that
      we
      are providing reliable financial reports. In addition, the design of any control
      system is based in part upon certain assumptions about the likelihood of future
      events. Because of these and other inherent limitations of control systems,
      there is only reasonable assurance that our controls will succeed in achieving
      their goals under all potential future conditions. If such controls fail to
      operate effectively, this may result in material errors in our financial
      statements. Deficiencies in our system of internal controls over financial
      reporting may require remediation, which could be costly. Failure to remediate
      such deficiencies or to implement required new or improved controls could lead
      to material errors in our financial statements, cause us to fail to meet our
      reporting obligations, and expose us to government investigation or legal
      action. Any of these results could cause investors to lose confidence in our
      reported financial information and could have a negative effect on the trading
      price of our common stock.




**Risks
      Related to the Regulation of Our Industry**




***New
      legislation and regulations directed at curbing predatory lending practices
      could restrict our ability to originate, purchase, price, sell, or finance
      non-prime residential mortgage loans, which could adversely impact our
      earnings.***




The
      Federal Home Ownership and Equity Protection Act, or HOEPA, identifies a
      category of residential mortgage loans and subjects such loans to restrictions
      not applicable to other residential mortgage loans. Loans subject to HOEPA
      consist of loans on which certain points and fees or the annual percentage
      rate,
      which is based on the interest rate and certain finance charges, exceed
      specified levels. Laws, rules and regulations have been adopted, or are under
      consideration, at the state and local levels that are similar to HOEPA in that
      they impose certain restrictions on loans that exceed certain cost parameters.
      These state and local laws generally have lower thresholds and broader
      prohibitions than under the federal law. The restrictions include prohibitions
      on steering borrowers into loans with high interest rates and away from more
      affordable products, selling unnecessary insurance to borrowers, flipping or
      repeatedly refinancing loans and originating loans without a reasonable
      expectation that the borrowers will be able to repay the loans without regard
      to
      the value of the mortgaged property.




41




Compliance
      with some of these restrictions requires lenders to make subjective judgments,
      such as whether a loan will provide a “net tangible benefit” to the borrower.
      These restrictions expose a lender to risks of litigation and regulatory
      sanction no matter how carefully a loan is underwritten and impact the way
      in
      which a loan is underwritten. The remedies for violations of these laws are
      not
      based on actual harm to the consumer and can result in damages that exceed
      the
      loan balance. Liability for violations of HOEPA, as well as violations of many
      of the state and local equivalents, would extend not only to us, but to
      assignees, which may include our warehouse lenders and whole-loan buyers,
      regardless of whether such assignee knew of or participated in the
      violation.




It
      is our
      policy not to originate loans that are subject to either HOEPA or these state
      and local laws and not to purchase high cost loans that violate those laws.
      If
      we miscalculate the numerical thresholds described above, however, we may
      mistakenly originate or purchase such loans and bear the related marketplace
      and
      legal risks and consequences. These thresholds below which we try to originate
      loans create artificial barriers to production and limit the price at which
      we
      can offer loans to borrowers and our ability to underwrite, originate, sell
      and
      finance mortgage loans. We may cease doing business in jurisdictions in the
      future where we, or our counterparties, make similar determinations with respect
      to anti-predatory lending laws. In a number of states, for example, proposed
      and
      recently enacted state and local anti-predatory lending laws and regulations
      broaden the trigger test for loans subject to restrictions. If the numerical
      thresholds were miscalculated, certain variations of our Liberty Loan product,
      where the lending decision is or may have been based entirely or primarily
      on
      the borrower’s equity in his or her home and not, or to a lesser extent, on a
      determination of the borrower’s ability to repay the loan, would violate HOEPA
      and many of these state and local anti-predatory lending laws. In the past,
      we
      have sold a portion of our Liberty Loan production to third parties on a
      whole-loan, servicing-released basis. Going forward, however, our ability to
      finance the origination of Liberty Loans and sell the Liberty Loan product
      to
      third parties could be impaired if our financing sources or mortgage investors
      are required or choose to incorporate prohibitions from certain anti-predatory
      lending practices into their eligibility criteria, even if the laws themselves
      do not specifically apply to us.




We
      may
      decide to purchase a loan that is covered by one of these laws, rules or
      regulations only if, in our judgment, the loan is made in accordance with our
      strict legal compliance standards and without undue risk relative to litigation
      or to the enforcement of the loan according to its terms. If we decide to
      originate loans subject to these laws, rules and regulations, we will be subject
      to greater risks for actual or perceived non-compliance, including demands
      for
      indemnification or loan repurchases from the parties to whom we broker or sell
      loans, class action lawsuits, increased defenses to foreclosure of individual
      loans in default, individual claims for significant monetary damages, and
      administrative enforcement actions. Any of the foregoing could materially harm
      our business, financial condition and results of operations.




Some
      of
      our competitors that are national banks or federally chartered thrifts and
      their
      operating subsidiaries may not be subject to these state and local laws and
      may
      as a consequence be able to capture market share from us and other lenders.
      Federal regulators have expressed their position that these preemption
      provisions benefit mortgage subsidiaries of federally chartered institutions
      as
      well. In January 2004, the Comptroller of the Currency finalized preemption
      rules that confirm and expand the scope of this federal preemption for national
      banks and their operating subsidiaries. Such federal preemption rules and
      interpretations generally have been upheld in the courts. At least one national
      rating agency has announced that, in recognition of the benefits of federal
      preemption, it will not require additional credit enhancement by federal
      institutions when they issue securities backed by mortgages from a state that
      it
      deems to have anti-predatory lending laws with clear and objective standards.
      As
      a non-federal entity, we will continue to be subject to such rating agency
      requirements arising from state or local lending-related laws or regulations.
      Accordingly, as a mortgage lender that is generally subject to the laws of
      each
      state in which we do business, except as may specifically be provided in federal
      rules applicable to all lenders, we may be subject to state legal requirements
      and legal risks under state laws to which these federally regulated competitors
      are not subject, and this disparity may have the effect of giving those federal
      entities legal and competitive advantages. Passage of additional laws in other
      jurisdictions could increase compliance costs, lower fee income and lower
      origination volume, all of which would have a material adverse effect on our
      results of operations, financial condition and business prospects.




42




The
      108 th United
      States Congress considered legislation, such as the Ney-Lucas Responsible
      Lending Act introduced in 2003, which, among other provisions, would limit
      fees
      that a lender is permitted to charge, including prepayment fees, restrict the
      terms lenders are permitted to include in their loan agreements and increase
      the
      amount of disclosure required to be given to potential borrowers. Similar
      legislation was introduced in the 109 th Congress. Certain Members of the 110 th Congress, responding to increased foreclosures in the subprime mortgage sector,
      have indicated that they are considering introducing legislation to restrict
      risky, higher-interest home loans made to consumers with blemished credit
      records. On March 27, 2007, the subcommittee on Financial Institutions and
      Consumer Credit of the U.S. House Committee on Financial Services held a hearing
      on subprime and predatory lending. The New York Attorney General has also
      recently stated that his office will investigate the practices of subprime
      lenders. We cannot predict whether or in what form Congress or the various
      state
      and local legislatures may enact legislation affecting our business. We are
      evaluating the potential impact of these initiatives, if enacted, on our lending
      practices and results of operations. As a result of these and other initiatives,
      we are unable to predict whether federal, state, or local authorities will
      require changes in our lending practices in the future, including reimbursement
      of fees charged to borrowers, or will impose fines. These changes, if required,
      could adversely affect our profitability, particularly if we make such changes
      in response to new or amended laws, regulations or ordinances in states where
      we
      originate a significant portion of our mortgage loans.




***The
      broad scope of our operations exposes us to risks of noncompliance with an
      increasing and inconsistent body of complex laws and regulations at the federal,
      state and local levels.***




Because
      we may originate, purchase and service mortgage loans in all 50 states, we
      must
      comply with the laws and regulations pertaining to licensing, disclosure and
      substantive practices, as well as judicial and administrative decisions, of
      all
      of these jurisdictions, as well as an extensive body of federal laws and
      regulations. The volume of new or modified laws and regulations has increased
      in
      recent years, and government agencies enforcing these laws, as well as the
      courts, sometimes interpret the same law in different ways. The laws and
      regulations of each of these jurisdictions are different, complex and, in some
      cases, in direct conflict with each other. As our operations continue to grow,
      it may be more difficult to identify comprehensively and to interpret accurately
      applicable laws and regulations and to employ properly our policies, procedures
      and systems and train our personnel effectively with respect to all of these
      laws and regulations, thereby potentially increasing our exposure to the risks
      of noncompliance with these laws and regulations. For example, individual cities
      and counties have begun to enact laws that restrict non-prime loan origination
      activities in those cities and counties. State and local governmental
      authorities have focused on the lending practices of companies in the non-prime
      mortgage lending industry, sometimes seeking to impose sanctions for practices
      such as charging excessive fees, imposing interest rates higher than warranted
      by the credit risk of the borrower, imposing prepayment fees, failing to
      adequately disclose the material terms of loans and abusive servicing and
      collection practices.




Our
      failure to comply with this regulatory regimen can lead to:




·
            civil
                and criminal liability, including potential monetary
                penalties;




·
            loss
                of lending licenses or approved status required for continued lending
                and
                servicing operations;




·
            demands
                for indemnification or loan repurchases from purchasers of our
                loans;




43




·
            legal
                defenses causing delay and expense;




·
            adverse
                effects on our ability, as servicer, to enforce
                loans;




·
            the
                borrower having the right to rescind or cancel the loan
                transaction;




·
            adverse
                publicity;




·
            individual
                and class action lawsuits;




·
            administrative
                enforcement actions;




·
            damage
                to our reputation in the industry;




·
            inability
                to sell our loans; or




·
            inability
                to obtain credit to fund our
                operations.




Although
      we have systems and procedures directed to compliance with these legal
      requirements and believe that we are in material compliance with all applicable
      federal, state and local statutes, rules and regulations, we cannot assure
      you
      that more restrictive laws and regulations will not be adopted in the future,
      or
      that governmental bodies or courts will not interpret existing laws or
      regulations in a more restrictive manner, which could render our current
      business practices non-compliant or which could make compliance more difficult
      or expensive. These applicable laws and regulations are subject to
      administrative or judicial interpretation, but some of these laws and
      regulations have been enacted only recently, or may be interpreted infrequently
      or only recently and inconsistently. As a result of infrequent, sparse or
      conflicting interpretations, ambiguities in these laws and regulations may
      leave
      uncertainty with respect to permitted or restricted conduct under them. Any
      ambiguity under a law to which we are subject may lead to regulatory
      investigations, governmental enforcement actions or private causes of action,
      such as class action lawsuits, with respect to our compliance with applicable
      laws and regulations.




***If
      financial institutions face exposure stemming from legal violations committed
      by
      the companies to which they provide financing or underwriting services, this
      could increase our borrowing costs and negatively affect the market for
      whole-loans and mortgage-backed securities.***




In
      June
      2003, a California jury found a warehouse lender and securitization underwriter
      liable in part for fraud on consumers committed by a lender to whom it provided
      financing and underwriting services. The jury found that the investment bank
      was
      aware of the fraud and substantially assisted the lender in perpetrating the
      fraud by providing financing and underwriting services that allowed the lender
      to continue to operate, and held it liable for 10% of the plaintiff’s damages.
      In December 2006, the appeal court affirmed
      the jury verdict on liability and remanded the matter for further proceedings
      on
      the proper calculation of damages. This is the first case we know of in which
      an
      investment bank was held partly responsible for violations committed by a
      mortgage lender customer. Shortly after the announcement of the jury verdict
      in
      the California case, the Florida Attorney General filed suit against the same
      financial institution, seeking an injunction to prevent it from financing
      mortgage loans within Florida, as well as damages and civil penalties, based
      on
      theories of unfair and deceptive trade practices and fraud. The suit claims
      that
      this financial institution aided and abetted the same lender involved in the
      California case in its commission of fraudulent representations in Florida.
      As
      of the date of this filing, there has been no ruling in this case. If other
      courts or regulators adopt this “aiding and abetting” theory, investment banks
      may face increased litigation as they are named as defendants in lawsuits and
      regulatory actions against the mortgage companies with which they do business.
      Some investment banks may exit the business, charge more for warehouse lending
      and reduce the prices they pay for whole-loans in order to build in the costs
      of
      this potential litigation. This could, in turn, have a material adverse effect
      on our results of operations, financial condition and business
      prospects.




44




***We
      may be subject to fines or other penalties based upon the conduct of our
      independent brokers.***




Mortgage
      brokers, from which we source some of our Tribeca loans, have parallel and
      separate legal obligations to which they are subject. While these laws may
      not
      explicitly hold the originating lenders responsible for the legal violations
      of
      mortgage brokers, increasingly federal and state agencies have sought to impose
      such assignee liability. For example, the FTC entered into a settlement
      agreement with a mortgage lender where the FTC characterized a broker that
      had
      placed all of its loan production with a single lender as the “agent” of the
      lender. The FTC imposed a fine on the lender in part because, as “principal,”
the lender was legally responsible for the mortgage broker’s unfair and
      deceptive acts and practices. In the past, the United States Department of
      Justice has sought to hold a non- prime mortgage lender responsible for the
      pricing practices of its mortgage brokers, alleging that the mortgage lender
      was
      directly responsible for the total fees and charges paid by the borrower under
      the Fair Housing Act even if the lender neither dictated what the mortgage
      broker could charge nor kept the money for its own account. Accordingly, we
      may
      be subject to fines or other penalties based upon the conduct of our independent
      mortgage broker customers.




***We
      are subject to significant legal and reputational risks and expenses under
      federal and state laws concerning privacy, use and security of customer
      information.***




The
      federal Gramm-Leach-Bliley financial reform legislation imposes significant
      privacy obligations on us in connection with the collection, use and security
      of
      financial and other nonpublic information provided to us by applicants and
      borrowers. In addition, California has enacted, and several other states are
      considering enacting, even more stringent privacy or
      customer-information-security legislation, as permitted under federal law.
      Because laws and rules concerning the use and protection of customer information
      are continuing to develop at the federal and state levels, we expect to incur
      increased costs in our effort to be and remain in full compliance with these
      requirements. Nevertheless, despite our efforts we will be subject to legal
      and
      reputational risks in connection with our collection and use of customer
      information, and we cannot assure you that we will not be subject to lawsuits
      or
      compliance actions under such state or federal privacy requirements. To the
      extent that a variety of inconsistent state privacy rules or requirements are
      enacted, our compliance costs could substantially increase.




***If
      many of our borrowers become subject to the Servicemembers Civil Relief Act
      of
      2003, our cash flows and interest income may be adversely
      affected.***




Under
      the
      Servicemembers Civil Relief Act, which in 2003 re-enacted the Soldiers’ and
      Sailors’ Civil Relief Act of 1940, or the Civil Relief Act, members of the
      military services on active duty receive certain protections and benefits.
      Under
      the Civil Relief Act, a borrower who enters active military service after the
      origination of his or her mortgage loan generally may not be required to pay
      interest above an annual rate of 6%, and the lender is restricted from
      exercising certain enforcement remedies, including foreclosure, during the
      period of the borrower’s active duty status. The Civil Relief Act also applies
      to a borrower who was on reserve status and is called to active duty after
      origination of the mortgage loan. Considering the large number of U.S. Armed
      Forces personnel on active duty and likely to be on active duty in the future,
      compliance with the Civil Relief Act could reduce our cash flow and the interest
      payments collected from those borrowers, and in the event of default or delay,
      prevent us from exercising the remedies for default that otherwise would be
      available to us.





45





**Risks
      Related to Our Securities**




***Thomas
      J. Axon effectively controls our company, substantially reducing the influence
      of our other stockholders.***




Thomas
      J.
      Axon, our Chairman and President, beneficially owns more than 43% of our
      outstanding common stock. As a result, Mr. Axon will be able to influence
      significantly the actions that require stockholder approval,
      including:




·
            the
                election of our directors; and




·
            the
                approval of mergers, sales of assets or other corporate transactions
                or
                matters submitted for stockholder
                approval.




Furthermore,
      the members of the board of directors as a group (including Mr. Axon)
      beneficially own a substantial majority of our outstanding common stock. As
      a
      result, our other stockholders may have little or no influence over matters
      submitted for stockholder approval. In addition, Mr. Axon’s influence and/or
      that of our current board members could preclude any unsolicited acquisition
      of
      us and consequently materially adversely affect the price of our common
      stock.




***Our
      organizational documents, Delaware law and our credit facility may make it
      harder for us to be acquired without the consent and cooperation of our board
      of
      directors, management and lender.***




Several
      provisions of our organizational documents, Delaware law and our credit facility
      may deter or prevent a takeover attempt, including a takeover attempt in which
      the potential purchaser offers to pay a per share price greater than the current
      market price of our common stock.




Our
      classified board of directors will make it more difficult for a person seeking
      to obtain control of us to do so. Also, our supermajority voting requirements
      may discourage or deter a person from attempting to obtain control of us by
      making it more difficult to amend the provisions of our certificate of
      incorporation to eliminate an anti-takeover effect or the protections they
      afford minority stockholders, and will make it more difficult for a stockholder
      or stockholder group to put pressure on our board of directors to amend our
      certificate of incorporation to facilitate a takeover attempt. In addition,
      under the terms of our certificate of incorporation, our board of directors
      has
      the authority, without further action by the stockholders, to issue shares
      of
      preferred stock in one or more series and to fix the rights, preferences,
      privileges and restrictions thereof. The ability to issue shares of preferred
      stock could tend to discourage takeover or acquisition proposals not supported
      by our current board of directors.




Section
      203 of the Delaware General Corporation Law, subject to certain exceptions,
      prohibits a Delaware corporation from engaging in any business combination
      with
      any interested stockholder (such as the owner of 15% or more of our outstanding
      common stock) for a period of three years following the date that the
      stockholder became an interested stockholder. The preceding provisions of our
      organizational documents, as well as Section 203 of the Delaware General
      Corporation Law, could discourage potential acquisition proposals, delay or
      prevent a change of control and prevent changes in our management, even if
      such
      events would be in the best interests of our stockholders.




In
      addition, our controlling shareholder ceasing to possess, directly or
      indirectly, the power to direct our management and policies through his
      ownership of our voting stock constitutes an event of default under our master
      credit facility, which, without a waiver from our principal lender, would cause
      our indebtedness to become immediately payable and could result in our
      insolvency if we are unable to repay our debt.





46





***Our
      quarterly operating results may fluctuate and cause our stock price to
      decline.***




Because
      of the nature of our business, our quarterly operating results may fluctuate,
      or
      we may incur operating losses, which we have experienced commencing with the
      second quarter of 2006, which may adversely affect the market price of our
      common stock. Our results may fluctuate as a result of any of the
      following:




·
            the
                timing and amount of collections on loans in our
                portfolio;




·
            the
                rate of delinquency, default, foreclosure and prepayment on the loans
                we
                hold and service;




·
            changes
                in interest rates;




·
            deviations
                in the amount or timing of collections on loans purchased from our
                expectations when we purchased such
                loans;




·
            our
                inability to identify and acquire additional mortgage loan portfolios
                or
                to originate loans;




·
            a
                decline in the estimated value of real property securing mortgage
                loans;




·
            increases
                in operating expenses associated with the growth of our
                operations;




·
            general
                economic and market conditions;




·
            the
                effects of state and federal tax, monetary and fiscal policies;
                and




·
            our
                inability to obtain additional financing to fund our
                growth.




Many
      of
      these factors are beyond our control, and we cannot predict their potential
      effects on the price of our common stock. We cannot assure you that the market
      price of our common stock will not fluctuate or decline significantly in the
      future.




***Various
      factors unrelated to our performance may cause the market price of our common
      stock to become volatile, which could harm our ability to access the capital
      markets in the future.***




The
      market price of our common stock may experience fluctuations that are unrelated
      to our operating performance. In particular, our stock price may be affected
      by
      general market movements as well as developments specifically related to the
      consumer finance industry, changes in home values, the financial services
      sector, the mortgage origination industry and the subprime origination sector.
      These could include, among other things, interest rate movements, quarterly
      variations or changes in financial estimates by securities analysts,
      governmental or regulatory actions or investigations of us or our lenders,
      or a
      significant reduction in the price of publicly traded securities of another
      participant in the consumer finance industry. This volatility may make it
      difficult for us to access the capital markets through additional secondary
      offerings of our common stock, regardless of our financial performance, and
      such
      difficulty may preclude us from being able to take advantage of certain business
      opportunities or meet our obligations.




***Future
      sales of our common stock may depress our stock
      price.***




Sales
      of
      a substantial number of shares of our common stock in the public market could
      cause a decrease in the market price of our common stock. In addition to the
      portion of our outstanding common stock that is freely tradable, we may issue
      additional shares in connection with our business and may grant equity-based
      awards to our employees, officers, directors and consultants. If a significant
      portion of these shares were sold in the public market, the market value of
      our
      common stock could be adversely affected.




47




***Compliance
      with the rules of the market in which our common stock trades and proposed
      and
      recently enacted changes in securities laws and regulations are likely to
      increase our costs.***




The
      Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated
      by
      the Securities and Exchange Commission and the national securities exchanges
      have increased the scope, complexity and cost of corporate governance, reporting
      and disclosure practices for public companies, including ourselves. These rules
      and regulations could also make it more difficult for us to attract and retain
      qualified executive officers and members of our board of directors, particularly
      to serve on our audit committee. Our common stock was listed on The Nasdaq
      National Market on July 19, 2005. Accordingly, we must comply with Nasdaq’s
      qualitative and quantitative requirements, which will require additional cost
      and effort on our part.




**ITEM
      1B.****UNRESOLVED
      STAFF COMMENTS**




Not
      applicable.




**ITEM
      2.****PROPERTIES**




On
      March
      4, 2005, we entered into a sublease agreement with Lehman Brothers Holdings
      Inc.
      to sublease approximately 33,866 square feet of space on the 25 th floor at
      101 Hudson Street, Jersey City, New Jersey for use as executive and
      administrative offices. Pursuant to the sublease, in 2006 we paid Lehman
      Brothers Holdings Inc. rent of approximately $65,615 per month. The term of
      the
      sublease is through December 30, 2010.




On
      July
      27, 2005, we entered into a lease agreement with 101 Hudson Leasing Associates
      to lease approximately 6,856 square feet of space on the 37 th floor at
      101 Hudson Street, Jersey City, New Jersey for use as administrative offices.
      Pursuant to the lease, in 2006 we paid 101 Hudson Leasing Associates rent of
      approximately $16,569 per month. The term of the lease is through December
      30,
      2010. After December 30, 2010, we will lease both the 25 th floor
      space and the 37 th floor
      space directly from 101 Hudson Leasing Associates. The term of this combined
      lease will be through December 30, 2013 for approximately $114,808 per month.
      In
      addition, we lease approximately 228 square feet of office space in Trevose,
      Pennsylvania under a lease agreement with a term expiring in 2007.




Our
      Tribeca subsidiary currently maintains its corporate headquarters on the
      6 th floor at
      Six Harrison Street, New York, New York, where we own a 6,600 square foot
      condominium unit. We have also leased two offices for Tribeca, one of which
      is
      in Marlton, New Jersey (approximately 2,426 square feet) under a lease agreement
      with a term expiring in July 2007 and the other of which is in Trevose,
      Pennsylvania (approximately 1,000 square feet) under a lease agreement with
      a
      term expiring in 2007.




On
      February 13, 2006, Tribeca entered into a lease agreement with 18 Harrison
      Development Associates, an entity controlled by Thomas J. Axon, to lease
      approximately 950 square feet on the 5 th floor at
      18 Harrison Street, New York, New York for use as additional office space.
      The
      term of the lease is through February 12, 2007, at approximately $4,880 per
      month, and the option to extend the lease for an additional period of one year
      at a rate of approximately $5,124 per month was exercised.





48





**ITEM
      3.****LEGAL
      PROCEEDINGS**




We
      are
      involved in routine litigation matters incidental to our business related to
      the
      enforcement of our rights under mortgage loans we hold, none of which is
      individually material. In addition, because we originate and service mortgage
      loans throughout the country, we must comply with various state and federal
      lending laws and we are routinely subject to investigation and inquiry by
      regulatory agencies, some of which arise from complaints filed by borrowers,
      none of which is individually material.




**ITEM
      4.****SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None.





49





**PART
      II**




**ITEM
                5.**
            **MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY
                SECURITIES**




***Market
      Information.*** Our
      common stock has traded on The Nasdaq National Market under the symbol “FCMC”
since July 19, 2005. Prior to such date, our common stock was quoted on the
      Over-The-Counter Bulletin Board (“OTCBB”) under the symbol “FCSC.”




The
      following table sets forth the bid prices for the common stock on the OTCBB
      and
      the sales prices for the common stock on The Nasdaq National Market, as
      applicable, for the periods indicated. Trading during these periods was limited
      and sporadic; therefore, the following quotes may not accurately reflect the
      true market value of the securities. Prices prior to July 19, 2005 reflect
      inter-dealer prices without retail markup or markdown or commissions and may
      not
      represent actual transactions, while prices from July 19, 2005 forward are
      as
      reported by The Nasdaq National Market.




**High**
            
            **Low****Year
                Ended December 31, 2004:**First
                Quarter
            
            $
            4.10
            
            $
            2.97Second
                Quarter
            
            
            4.10
            
            
            3.35Third
                Quarter
            
            
            6.50
            
            
            3.33Fourth
                Quarter
            
            
            13.00
            
            
            6.41**Year
                Ended December 31, 2005:**First
                Quarter
            
            
            13.75
            
            
            8.65Second
                Quarter
            
            
            14.00
            
            
            9.00Third
                Quarter
            
            
            12.95
            
            
            9.50Fourth
                Quarter
            
            
            10.40
            
            
            7.35**Year
                Ended December 31, 2006:**First
                Quarter
            
            
            8.99
            
            
            6.53Second
                Quarter
            
            
            8.55
            
            
            7.02Third
                Quarter
            
            
            8.20
            
            
            6.75Fourth
                Quarter
            
            
            7.10
            
            
            4.60





***Holders.*** As of
      March 23, 2007, there were approximately 444 record holders of the Company’s
      common stock.




***Dividend
      Policy.*** We have
      not paid cash dividends on our common stock in recent years and do not expect
      to
      pay a cash dividend in the near future. We currently intend to retain future
      earnings to finance our operations and expand our business. Any future
      determination to pay cash dividends will be at the discretion of the board
      of
      directors and will depend upon a complete review and analysis of all relevant
      factors, including our financial condition, operating results, capital
      requirements and any other factors the board of directors deems relevant. In
      addition, our agreements with our lenders may, from time to time, restrict
      our
      ability to pay dividends.




**Recent
      Sales of Unregistered Securities**




None.





50





**ITEM
                6.**
            **SELECTED
                FINANCIAL DATA**




The
      selected financial data set forth below as of and for the years ended December
      31, 2006, 2005, 2004, 2003 and 2002, have been derived from the Company’s
      audited consolidated financial statements. This information should be read
      in
      conjunction with Item 1. “Business” and Item 7. “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations,” as well as the
      audited financial statements and notes thereto included in Item 8. “Financial
      Statements.”




**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Statement
                of Income Data**Interest
                income
            
            $
            141,857,267
            
            $
            99,046,543
            
            $
            59,481,422
            
            $
            42,699,710
            
            $
            36,728,735Purchase
                discount earned
            
            
            8,924,838
            
            
            11,214,721
            
            
            9,234,896
            
            
            5,154,601
            
            
            3,841,927Total
                revenues
            
            
            163,753,085
            
            
            121,399,214
            
            
            77,191,058
            
            
            55,661,265
            
            
            45,827,176Interest
                expense
            
            
            113,073,332
            
            
            68,329,965
            
            
            33,166,815
            
            
            21,601,651
            
            
            19,127,713Amortization
                of deferred financing costs
            
            
            4,568,744
            
            
            4,105,218
            
            
            2,761,476
            
            
            1,979,208
            
            
            1,264,112Collection,
                general and administrative
            
            
            38,286,150
            
            
            28,700,133
            
            
            21,752,591
            
            
            16,989,446
            
            
            12,607,617Total
                expenses
            
            
            166,842,624
            
            
            106,957,738
            
            
            61,881,105
            
            
            44,239,420
            
            
            34,390,469(Loss)/income
                before provision
              for
                income taxes
            
            
            (3,089,539
            )
            
            14,441,476
            
            
            15,309,953
            
            
            11,421,845
            
            
            11,436,707Net
                (loss)/income
            
            $
            (1,761,038
            )
            $
            7,868,775
            
            $
            8,366,608
            
            $
            5,639,075
            
            $
            6,258,207(Loss)/earnings
                per share, basic
            
            $
            (0.23
            )
            $
            1.19
            
            $
            1.41
            
            $
            0.95
            
            $
            1.06(Loss)/earnings
                per share, diluted
            
            $
            (0.23
            )
            $
            1.09
            
            $
            1.25
            
            $
            0.86
            
            $
            1.01Book
                value per share
            
            $
            5.93
            
            $
            6.31
            
            $
            4.31
            
            $
            2.94
            
            $
            1.99





51








**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002****Balance
                Sheet Data**Notes
                receivable, principal
            
            $
            1,174,039,567
            
            $
            934,657,413
            
            $
            811,885,856
            
            $
            465,553,870
            
            $
            435,259,394Purchase
                discount
            
            
            (12,423,746
            )
            
            (17,809,940
            )
            
            (32,293,669
            )
            
            (25,678,165
            )
            
            (22,974,310
            )Allowance
                for loan losses
            
            
            (52,424,375
            )
            
            (67,276,155
            )
            
            (89,628,299
            )
            
            (46,247,230
            )
            
            (45,841,651
            )Net
                notes receivable
            
            
            1,109,191,446
            
            
            849,571,318
            
            
            689,963,888
            
            
            393,628,475
            
            
            366,443,433Originated
                loans held for sale
            
            
            4,114,284
            
            
            12,844,882
            
            
            16,851,041
            
            
            27,372,779
            
            
            22,869,947Originated
                loans held for investment, net
            
            
            422,682,795
            
            
            372,315,935
            
            
            110,496,274
            
            
            9,536,669
            
            
            -Other
                real estate owned
            
            
            22,977,725
            
            
            19,936,274
            
            
            20,626,156
            
            
            13,981,665
            
            
            9,353,884Total
                assets
            
            
            1,668,357,999
            
            
            1,332,792,692
            
            
            883,592,242
            
            
            474,059,988
            
            
            423,195,069Notes
                payable, net of debt discount(1)
            
            
            1,520,217,264
            
            
            1,203,880,994
            
            
            805,586,997
            
            
            426,356,304
            
            
            395,266,144Total
                stockholders’ equity
            
            
            47,553,349
            
            
            47,594,168
            
            
            26,145,833
            
            
            17,408,959
            
            
            11,769,884**Selected
                Performance Ratios**Return
                on average assets(2)
            
            
            (0.12
            )%
            
            0.71
            %
            
            1.23
            %
            
            1.26
            %
            
            1.65
            %Return
                on average equity(3)
            
            
            (3.70
            )%
            
            21.34
            %
            
            38.42
            %
            
            38.65
            %
            
            72.43
            %Total
                revenue/average assets(4)
            
            
            10.91
            %
            
            10.95
            %
            
            11.36
            %
            
            12.40
            %
            
            12.11
            %Interest
                expense/average assets(5)
            
            
            7.84
            %
            
            6.54
            %
            
            5.29
            %
            
            5.25
            %
            
            5.39
            %Collection,
                general and administrative expenses as a percentage of average
                assets(6)
            
            
            2.55
            %
            
            2.59
            %
            
            3.20
            %
            
            3.78
            %
            
            3.33
            %Efficiency
                ratio(7)
            
            
            83.03
            %
            
            58.61
            %
            
            52.72
            %
            
            52.96
            %
            
            49.57
            %**Balance
                Sheet Ratios**Equity
                to assets
            
            
            2.85
            %
            
            3.57
            %
            
            2.96
            %
            
            3.67
            %
            
            2.78
            %Allowance
                for loan losses/total notes receivable and loans held for investment
                and
                sale
            
            
            3.30
            %
            
            5.17
            %
            
            9.88
            %
            
            9.70
            %
            
            10.53
            %**Other**Nonaccretable
                purchase discount/total notes receivable(8)
            
            
            5.21
            %
            
            2.62
            %
            
            N/A
            
            
            N/A
            
            
            N/A**Selected
                Performance Data**Loans
                acquired, at purchase price
            
            $
            572,011,360
            
            $
            468,324,936
            
            $
            544,288,354
            
            $
            213,638,801
            
            $
            184,090,904Loan
                originations
            
            $
            384,743,578
            
            $
            427,260,472
            
            $
            200,301,285
            
            $
            97,431,553
            
            $
            70,444,721







(1)
            Debt
                discount was $515,799, $3,002,767 and $2,131,041 for 2006, 2005 and
                2004,
                respectively.


(2)
            Computed
                by dividing net income by average total assets for the period using
                beginning and ending period balances.


(3)
            Computed
                by dividing net income by average equity for the period using beginning
                and ending period balances.


(4)
            Computed
                by dividing total revenue by average total assets for the period
                using
                beginning and ending period balances.


(5)
            Computed
                by dividing interest expense, inclusive of amortization of deferred
                financing costs, by average total assets for the period using beginning
                and ending period balances.


(6)
            Computed
                by dividing collection, general and administrative expenses by average
                total assets for the period using beginning and ending period
                balances.


(7)
            Computed
                by dividing collection, general and administrative expenses by total
                revenues less interest expense and amortization of deferred financing
                costs.


(8)
            See
                Notes to the Consolidated Financial Statements for details on
                nonaccretable purchase discount.





52





**ITEM
                7.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**




*This
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations includes forward-looking statements. We have based these
      forward-looking statements on our current plans, expectations and beliefs about
      future events. In light of the risks, uncertainties and assumptions discussed
      under Item 1A. “Risk Factors” of this Annual Report on Form 10-K and other
      factors discussed in this section, there are risks that our actual experience
      will differ materially from the expectations and beliefs reflected in the
      forward-looking statements in this section and throughout this report. For
      more
      information regarding what constitutes a forward-looking statement, please
      refer
      to Item 1A. “Risk Factors.”*




**General**




The
      following discussion of our operations and financial condition should be read
      in
      conjunction with our financial statements and notes thereto included elsewhere
      in this Form 10-K. In these discussions, most percentages and dollar amounts
      have been rounded to aid presentation. As a result, all such figures are
      approximations.




**Overview**




The
      following management’s discussion and analysis of financial condition and
      results of operations is based on the amounts reported in the Company’s
      consolidated financial statements. These financial statements are prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America. In preparing the financial statements, management is required to make
      various judgments, estimates and assumptions that affect the reported amounts.
      Changes in these estimates and assumptions could have a material effect on
      the
      Company’s consolidated financial statements.




**Executive
      Level Summary**




The
      Company had a net loss of $1.8 million for 2006, compared with net income of
      $7.9 million for 2005 and $8.4 million for 2004. Net income decreased in 2006
      from 2005 by 122%. The loss per common share for 2006 was $0.23 on both a
      diluted and basic basis, compared to earnings per common share of $1.09 on
      a
      diluted basis and $1.19 on a basic basis for 2005 and $1.25 and $1.41 for 2004.
      Our revenues for 2006 increased by 35% to $163.8 million, from 2005 revenues
      of
      $121.4 million, while interest expense (inclusive of amortization of deferred
      financing costs) increased 62% to $117.6 million. During 2006, we closed
      acquisitions of assets, principally subprime second-lien loans, with an
      aggregate face amount of $621.4 million, comprised of approximately $520.0
      million of bulk acquisitions and $101.4 million of flow acquisitions, and
      originated $384.7 million of subprime loans. We grew the size of our total
      portfolio of aggregate net notes receivable, loans held for sale, loans held
      for
      investment and OREO at the end of 2006 to $1.56 billion from $1.25 billion
      at
      the end of 2005. Our total debt outstanding, including notes payable (senior
      debt) and financing agreements, grew to $1.58 billion at the end of 2006 from
      $1.26 billion at the end of 2005. Our average cost of funds during 2006
      increased to 7.98% from 6.63% during 2005.




Stockholders’
      equity decreased slightly to $47.6 million at the end of 2006, and amounted
      to
      2.85% of year-end assets.




In
      December 2006, pursuant to an agreement executed with our lender, all success
      fee obligations under all of our master credit facilities were eliminated in
      exchange for a cash settlement of $4.5 million. As a result, success fee
      liability at December 31, 2006 was eliminated compared with $5.7 million at
      year-end 2005, and the debt discount was reduced to $516,000 at year-end 2006
      from $3.0 million at year-end 2005.




53




**Application
      of Critical Accounting Policies and Estimates**





The
      following discussion and analysis of financial condition and results of
      operations is based on the amounts reported in our consolidated financial
      statements, which are prepared in accordance with accounting principles
      generally accepted in the United States of America, or GAAP. In preparing the
      consolidated financial statements, management is required to make various
      judgments, estimates and assumptions that affect the financial statements and
      disclosures. Changes in these estimates and assumptions could have a material
      effect on our consolidated financial statements. The following is a summary
      of
      the accounting policies believed by management to be those that require
      subjective and complex judgment that could potentially affect reported results
      of operations. Management believes that the estimates and judgments used in
      preparing these consolidated financial statements were the most appropriate
      at
      that time.




***Notes
      Receivable and Income Recognition*** - The
      Company’s notes receivable portfolio consists primarily of secured real estate
      mortgage loans purchased from financial institutions, mortgage and finance
      companies. Such notes receivable are performing, non-performing or
      sub-performing at the time of purchase and are generally purchased at a discount
      from the principal balance remaining. Notes receivable are stated at the amount
      of unpaid principal, reduced by purchase discount and allowance for loan losses.
      Notes purchased after December 31, 2004 that meet the requirements of AICPA
      Statement of Position (SOP) No. 03-3, *Accounting
      for Certain Loans or Debt Securities Acquired in a Transfer* (“SOP
      03-3”) are stated net of purchase discount. Impaired notes receivable are
      measured based on the present value of expected future cash flows discounted
      at
      the note’s effective interest rate or, as a practical expedient, at the
      observable market price of the note receivable or the fair value of the
      collateral if the note is collateral dependent. The Company periodically
      evaluates the collectibility of both interest and principal of its notes
      receivable to determine whether they are impaired. A note receivable is
      considered impaired when it is probable the Company will be unable to collect
      all contractual principal and interest payments due in accordance with the
      terms
      of the note.




In
      general, interest on the notes receivable is calculated based on contractual
      interest rates applied to daily balances of the principal amount outstanding
      using the accrual method. Accrual of interest on notes receivable, including
      impaired notes receivable, is discontinued when management believes, after
      considering economic and business conditions and collection efforts, that the
      borrower’s financial condition is such that collection of interest is doubtful.
      When interest accrual is discontinued, all unpaid accrued interest is reversed
      to interest income. Subsequent recognition of income occurs only to the extent
      payment is received, subject to management’s assessment of the collectibility of
      the remaining interest and principal. A non-accrual note is restored to an
      accrual status when it is no longer delinquent and collectibility of interest
      and principal is no longer in doubt and past due interest is recognized at
      that
      time.




***Discounts
      on Acquired Loans*** -
      Effective January 1, 2005, as a result of the adoption of SOP 03-3 the Company
      was required to change its accounting for loans acquired subsequent to December
      31, 2004 that have evidence of deterioration of credit quality since origination
      and for which it is probable, at the time of our acquisition, that the Company
      will be unable to collect all contractually required payments. For these loans,
      the excess of the undiscounted contractual cash flows over the undiscounted
      cash
      flows estimated by us at the time of acquisition is not accreted into income
      (nonaccretable discount). The amount representing the excess of cash flows
      estimated by us at acquisition over the purchase price is accreted into interest
      income over the life of the loan (accretable discount). The nonaccretable
      discount is not accreted into income.




If
      cash
      flows cannot be reasonably estimated for any loan, and collection is not
      probable, the cost recovery method of accounting is used. Under the cost
      recovery method, any amounts received are applied against the recorded amount
      of
      the loan.




54




Subsequent
      to acquisition, if cash flow projections improve, and it is determined that
      the
      amount and timing of the cash flows related to the nonaccretable discount are
      reasonably estimable and collection is probable, the corresponding decrease
      in
      the nonaccretable discount is transferred to the accretable discount and is
      accreted into interest income over the remaining life of the loan on the
      interest method. If cash flow projections deteriorate subsequent to acquisition,
      the decline is accounted for through the allowance for loan losses.




There
      is
      judgment involved in estimating the amount of the loan’s future cash flows. The
      amount and timing of actual cash flows could differ materially from management’s
      estimates, which could materially affect our financial condition and results
      of
      operations. Depending on the timing of an acquisition, the initial allocation
      of
      discount may be made primarily to nonaccretable discount until the Company
      has
      boarded all loans onto its servicing system; at that time, any cash flows
      expected to be collected over the purchase price will be transferred to
      accretable discount. Generally, the allocation will be finalized no later than
      ninety days from the date of purchase.




For
      loans
      not addressed by SOP 03-3 that are acquired subsequent to December 31, 2004,
      the
      discount, which represents the excess of the amount of reasonably estimable
      and
      probable discounted future cash collections over the purchase price, is accreted
      into purchase discount using the interest method over the term of the loans.
      This is consistent with the method the Company utilizes for its accounting
      for
      loans purchased prior to January 1, 2005, except that for these loans an
      allowance allocation was also made at the time of acquisition.




***Allowance
      for Loan Losses*** - The
      Company performs reviews of its loan portfolio upon purchase, at loan boarding,
      and on a frequent basis thereafter to segment impaired loans under (“SFAS”) No.
      114, *Accounting
      by Creditors for Impairment of a Loan - an amendment of FASB Statements No.
      5
      and 15* .
      A loan
      is considered impaired when it is probable that we will be unable to collect
      all
      contractual principal and interest payments due in accordance with the terms
      of
      the note agreement. An allowance for loan losses is estimated based on our
      impairment analysis. Management’s judgment in determining the adequacy of the
      allowance for loan losses is based on the evaluation of individual loans within
      the portfolios, the known and inherent risk characteristics and size of the
      portfolio, the assessment of current economic and real estate market conditions,
      estimates of the current value of underlying collateral, past loan loss
      experience and other relevant factors. In connection with the determination
      of
      the allowance for loan losses, management obtains independent appraisals for
      the
      underlying collateral when considered necessary. Management believes that the
      allowance for loan losses is adequate. The allowance for loan losses is a
      material estimate, which could change significantly in the near
      term.




Effective
      January 1, 2005, and as a result of the adoption of SOP 03-3, additions to
      the
      valuation allowances relating to newly acquired loans reflect only those losses
      incurred by us subsequent to acquisition. The Company no longer increases the
      allowances through allocations from purchase discount for loans that meet the
      requirements of SOP 03-3. Additionally, general risk allocations are no longer
      applied to loans purchased subsequent to December 31, 2004. Consequently, the
      allowance for loan losses has declined since the adoption of SOP 03-3, and
      it is
      anticipated that the allowance will continue to decline as credits for loan
      losses may continue to be recorded if loans pay off and allowances related
      to
      these loans are not required or additions due to loan impairment are not
      required.




***Originated
      Loans Held for Investment*** - During
      the third quarter of 2006, the Company modified its estimate of the
      collectibility of accrued interest on certain fully secured loans that are
      in
      the foreclosure process. The Company continues to accrue interest on secured
      real estate first mortgage loans originated by the Company up to a maximum
      of
      209 days contractually delinquent with a recency payment in the last 179 days,
      and that are judged to be fully recoverable for principal and substantially
      all
      accrued interest based in many cases on a foreclosure analysis, which includes
      an updated estimate of the realizable value of the property securing the
      loan.




55




In
      general, interest on originated loans held for investment is calculated based
      on
      contractual interest rates applied to daily balances of the principal amount
      outstanding using the accrual method. The Company’s decision to revise its
      estimate of collectibility was based on recent collection information, which
      shows that the Company is collecting 100% of principal and between 90% to 100%
      of delinquent interest when these loans in the foreclosure process are paid
      off
      or settled.




The
      accrual of interest is discontinued when management believes, after considering
      economic and business conditions and collection efforts that the borrower’s
      financial condition is such that collection of interest is doubtful, which
      can
      be less than 209 days contractually delinquent with a recency payment in the
      last 179 days. When interest accrual is discontinued, all unpaid accrued
      interest is reversed against interest income. Subsequent recognition of income
      occurs only to the extent payment is received, subject to management’s
      assessment of the collectibility of the remaining interest and principal. A
      non-accrual loan is restored to an accrual status when the collectibility of
      interest and principal is no longer in doubt and past due interest is recognized
      at that time.




***Other
      Real Estate Owned*** - Other
      real estate owned (“OREO”) consists of properties acquired through, or in lieu
      of, foreclosure or other proceedings and are held for sale and carried at the
      lower of cost or fair value less estimated costs to sell. Any write-down to
      fair
      value, less cost to sell, is charged to earnings based upon management’s
      continuing assessment of the fair value of the underlying collateral. OREO
      is
      evaluated periodically to ensure that the recorded amount is supported by
      current fair values and valuation allowances are recorded as necessary to reduce
      the carrying amount to fair value less estimated cost to sell. Revenue and
      expenses from the operation of OREO and changes in the valuation allowance
      are
      included in operations. Direct costs relating to the development and improvement
      of the property are capitalized, subject to the limit of fair value of the
      property, while costs related to holding the property are expensed. Gains or
      losses are included in operations upon disposal of the property.




**Results
      of Operations**




***Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005***




***Overview.*** The
      Company had a net loss of $1.8 million for the twelve months of 2006, compared
      with net income of $7.9 million for the twelve months of 2005, a decrease of
      122%. Revenues increased by 35% to $163.8 million for the twelve months ended
      December 31, 2006, from $121.4 million for the twelve months ended December
      31,
      2005. Loss per common share for the twelve months ended December 31, 2006 was
      $0.23 both on a diluted and a basic basis, compared to earnings per common
      share
      of $1.09 and $1.19 for the twelve months ended December 31, 2005, respectively.
      During 2006, we acquired assets with an aggregate face amount of $621.4 million,
      $564.9 million of which were second-lien 1-4 family residential loans, and
      we
      originated $384.7 million of subprime 1-4 family residential mortgage loans.
      We
      increased the size of our total portfolio of net notes receivable, loans held
      for sale, loans held for investment and OREO at the end of 2006 to $1.56 billion
      from $1.25 billion at the end of 2005. Correspondingly, our total debt
      outstanding grew to $1.58 billion at December 31, 2006 from $1.26 billion
      at December 31, 2005. As a result of the increase of our total debt outstanding,
      and the impact of the dramatic 400-plus point rise in short-term interest rates
      since mid-2004 on our interest-sensitive borrowings, interest expense (inclusive
      of amortization of deferred financing costs and success fees) increased $45.2
      million, or 62%, to $117.6 million, during the twelve months of 2006, compared
      with the same period in 2005. Our average cost of funds during the twelve months
      ended December 31, 2006 increased to 7.98% from 6.63% during the twelve months
      ended December 31, 2005. At December 31, 2006, the weighted average interest
      rate of borrowed funds was 7.99%. In December 2006, pursuant to an agreement
      executed with our lender, all success fee obligations under our master credit
      facilities were eliminated in exchange for a cash settlement of $4.5 million.
      As
      a result, success fee liability at December 31, 2006 was eliminated compared
      with $5.7 million at year-end 2005, and the debt discount was reduced to
      $516,000 at year-end 2006 from $3.0 million at year-end 2005. Collection,
      general and administrative expenses increased $9.6 million, or 33%, to $38.3
      million, during 2006 from $28.7 million for 2005. The increase in collection,
      general and administrative expenses reflected for the most part the growth
      of
      the Company during the past two years. During the past twelve months, total
      assets increased 25% from December 31, 2005, while as a percentage of average
      assets, collection, general and administrative expenses decreased from 2.59%
      in
      2005 to 2.55% in 2006. The provision for loan losses increased $5.0 million
      to
      $9.8 million in the twelve months ended December 31, 2006, principally due
      to
      higher default rates experienced in certain pools of loans purchased in
      mid-2004. Stockholders’ equity decreased by $41,000 to $47.6 million at year-end
      2006.




56




***Revenues.*** Revenues
      increased by $42.4 million, or 35%, to $163.8 million during 2006, from $121.4
      million during 2005. Revenues include interest income, purchase discount earned,
      gains on sales of notes receivable, gains on sales of originated loans, gains
      on
      sales of OREO and prepayment penalties and other income.




Interest
      income increased by $42.8 million or 43%, to $141.9 million during 2006 from
      $99.0 million 2005. The increase in interest income reflected the significant
      increase in the portfolio of gross notes receivable and loans held for
      investment, partially offset by an increase in loans held for investment that
      were placed on non-accrual, during the twelve months ended December 31, 2006
      compared to the twelve months ended December 31, 2005.




Purchase
      discount earned decreased by $2.3 million, or 20%, to $8.9 million during the
      twelve months ended December 31, 2006 from $11.2 million during the twelve
      months ended December 31, 2005. This decrease resulted primarily from the
      increase in the purchase price of portfolios relative to unpaid principal at
      acquisition of portfolios purchased during 2005 and 2006, particularly in the
      second half of 2005, which resulted in less purchase discount available for
      accretion of discount compared with portfolios purchased in prior years, coupled
      with a lower balance of purchase discount available for accretion from pre-2005
      acquisitions. In addition, principally all of the discount on 2006 acquisitions
      was recorded as “Nonaccretable discount,” which is not accreted to income. We
      received $281.7 million of principal payments from notes receivable during
      2006
      compared with $271.7 million of principal payments during 2005.




Gain
      on
      sale of notes receivable decreased by $1.1 million, or 87%, to $164,000 for
      the
      twelve months ended December 31, 2006 from $1.3 million for the twelve months
      ended December 31, 2005. The Company sold $3.8 million in performing notes
      receivable and $161,000 of non-performing notes receivable during 2006, as
      compared to a total of $13.6 million of performing notes receivable and
      non-performing notes receivable (credit card receivables) with a face amount
      of
      $23.5 million during 2005.




Gain
      on
      sale of originated loans increased by $595,000, or 47%, to $1.9 million during
      the twelve months ended December 31, 2006, from $1.3 million during the twelve
      months ended December 31, 2005. The gain on originated loans sold in 2006
      declined to 1.56%, compared with 2.10% in 2005. The Company sold $119.8 million
      of originated loans during 2006, compared with $60.7 million of loans sold
      during 2005. $42.8 million of the loans sold in 2006 were estimated to be
      repurchased and its corresponding $657,000 gain was reserved and, therefore,
      excluded from the net gain, and another $7.5 million of loans that were
      originated specifically for sale to investors, but, for various reasons, did
      not
      meet investor requirements were sold at a loss. Excluding the loans that were
      expected to be repurchased, the average gain on loans sold increased to 2.43%
      during 2006 from 2.10% during 2005 due principally to the sale of $38.6 million
      of high yielding Liberty Loans that are generally held for investment. Excluding
      both the $42.8 million and $7.5 million of loans referred to above, the average
      gain on loans sold was 2.71% for the twelve months ended December 31,
      2006.




Gain
      on
      sale of OREO increased by $160,000, or 9%, to $1.9 million during the twelve
      months ended December 31, 2006, from $1.8 million during the twelve months
      ended
      December 31, 2005. We sold 528 OREO properties with an aggregate carrying value
      of $30.4 million during the twelve months of 2006, as compared to 487 OREO
      properties in the aggregate carrying value of $30.7 million during the twelve
      months of 2005. The increase in the number of properties sold reflected the
      growth in our OREO inventory due to an increase in foreclosures as our notes
      receivable portfolio grew significantly during the past two years.




57




Prepayment
      penalties and other income (principally late charges, recovered foreclosure
      costs and other servicing fees) increased by $2.2 million, or 33%, to $9.0
      million during 2006 from $6.8 million during 2005. This increase was primarily
      due to an increase in prepayment penalties received, as a result of increased
      loan pay offs, principally from originated Liberty Loans during the twelve
      months ended December 31, 2006, as compared with the twelve months ended
      December 31, 2005. This also was the result of the increased size of both our
      portfolio of purchased loans and loans held for investment, combined with
      continued relatively low mortgage interest rates. Increased late charges
      resulting primarily from the growth in the size of our loan portfolios as well
      as recovered legal costs due to increased legal settlement costs contributed
      to
      the increase.




***Operating
      Expenses.*** Operating expenses increased by $59.9 million, or 56%, to $166.8 million during
      2006 from $107.0 million during 2005. Total operating expenses include interest
      expense, collection, general and administrative expenses, provisions for loan
      losses, amortization of deferred financing costs and depreciation
      expense.




Interest
      expense increased by $44.7 million, or 65%, to $113.1 million during the twelve
      months ended December 31, 2006, from $68.3 million during the twelve months
      ended December 31, 2005. This increase was the result of the increase in total
      debt, which was $1.58 billion as of December 31, 2006 as compared with $1.26
      billion as of December 31, 2005, reflecting additional borrowings to fund the
      growth in total assets during this period. The amortization of debt discount
      recognized from success fees increased to $1.9 million in 2006, compared with
      $1.2 million in 2005. In addition, our average cost of funds during the twelve
      months ended December 31 ,
      2006
      increased to 7.98% from 6.63% during the twelve months ended December 31, 2005,
      reflecting the continued dramatic rise in short-term interest rates and its
      effect on our interest-rate sensitive borrowings, substantially all of which
      are
      based on the 30-day LIBOR rate.




Collection,
      general and administrative expenses increased by $9.6 million, or 33%, to $38.3
      million during 2006, from $28.7 million during 2005. Collection, general and
      administrative expenses as a percentage of average assets decreased slightly
      from 2.59% during the twelve months ended December 31, 2005 to 2.55% during
      2006, while the Company’s total assets increased by 25% since December 31, 2005.
      Salaries and employee benefits expenses increased by $5.2 million, or 51%,
      reflecting an increase in the number of employees and stock option and
      restricted stock expenses for certain members of senior management recognized
      in
      2006. We ended 2006 with 232 employees as compared to 216 at the end of 2005.
      During 2006, we hired new employees at higher salary levels throughout the
      Company, the largest number of employees in the servicing and sales departments,
      to replace personnel who resigned or were terminated during the year. The use
      of
      contract staff to help accommodate the growth of the Company’s portfolios and an
      increase in health benefits costs also contributed to the year-over-year
      increase in total salaries and employee benefits expenses. During 2006, the
      cost
      of stock options and restricted stock and related expenses for certain senior
      executives totaled $1.6 million, compared with $762,000 for the twelve months
      ended December 31, 2005. Legal fees, principally relating to increased activity
      with respect to foreclosures, increased by $1.2 million, or 29%, to $5.3 million
      in 2006 from $4.1 million during the same period last year. The cost of outside
      services, such as appraisals and title searches, incurred in servicing
      delinquent loans increased by $980,000, or 95%, to $2.0 million during the
      twelve months ended December 31, 2006 from $1.0 million during 2005 due to
      increases in foreclosure activity as a result of a larger total portfolio of
      notes receivable, loans held for investment and certain loans purchased in
      various stages of delinquency and foreclosure. Professional fees increased
      by
      $983,000, or 46%, from $2.1 million during the twelve months ended December
      31,
      2005 due to increased audit, tax, consulting and recruiting fees.  Loan
      portfolio acquisition costs increased by $654,000, or 34%, to $2.6 million
      in
      2006 from $1.9 million during the twelve months ended December 31, 2005,
      principally due to increased direct costs associated with both portfolios
      purchased and portfolios considered for purchase compared to the same period
      last year. Other general and administrative expenses increased by $618,000,
      or
      7%, to $10.0 million in 2006 from $9.4 million during the twelve months ended
      December 31, 2005, principally due to increased computer licensing and support
      expenses and increased imaging and scanning expenses.






58




The
      provision for loan losses increased by $5.0 million, or 105%, to $9.8 million
      during the twelve months ended December 31, 2006, from $4.7 million during
      the
      twelve months ended December 31, 2005. This increase was primarily due to higher
      than expected default rates experienced in certain pools of loans purchased
      in
      mid-2004, and, to a lesser extent, to a larger portfolio of notes
      receivable.




Amortization
      of deferred financing costs increased by $464,000, or 11%, to $4.6 million
      during the twelve months of 2006 from $4.1 million during the twelve months
      of
      2005. This increase resulted primarily from the growth in debt to fund the
      expansion of the portfolio of loans acquired and originated.




Depreciation
      expenses increased by $87,000, or 8%, to $1.2 million in the twelve months
      ended
      December 31, 2006, principally due to leasehold improvements related to the
      Company’s new office facility in New Jersey and the addition and upgrading of
      computer hardware and software.




Our
      pre-tax income decreased by $17.5 million, or 121%, to a loss of $3.1 million
      during 2006 from $14.4 million during 2005 for the reasons set forth
      above.




During
      2006, the Company had a tax benefit of $1.3 million due to the loss incurred
      as
      compared to a tax provision of $6.6 million in 2005. The effective tax rate
      for
      2005 was 46%.




***Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004***




***Overview.*** Net
      income totaled $7.9 million for the twelve months of 2005, compared with $8.4
      million for the twelve months of 2004, a decrease of 6.0%. Revenues increased
      by
      57.3% to $121.4 million for the twelve months ended December 31, 2005, from
      $77.2 million during 2004. Earnings per common share for the twelve months
      ended
      December 31, 2005 was $1.09 on a diluted basis and $1.19 on a basic basis,
      compared to $1.25 and $1.41 for 2004, respectively. Net income per common share
      for the twelve months ended December 31, 2005 was affected somewhat by the
      increase in the number of shares outstanding as a result of the Company’s stock
      offering, which was completed in August. During 2005, we acquired S&D loans
      with an aggregate face amount of $505.7 million and we originated $427.3 million
      of subprime loans. We increased the size of our total portfolio of net notes
      receivable, loans held for sale, loans held for investment and OREO at the
      end
      of 2005 to $1.25 billion from $837.9 million at the end of 2004. Our total
      debt
      outstanding, therefore, grew to $1.26 billion at December 31, 2005 from
      $845.1 million at December 31, 2004. As a result of the increase in the
      size of our total debt, and due to the rise in short-term interest rates since
      mid-2004 and its impact on our interest-sensitive borrowings, interest expense
      (inclusive of deferred financing costs and amortization of estimated success
      fees payable) increased $36.5 million, or 101.6% during 2005 compared with
      the
      same period in 2004. Our average cost of funds during the twelve months ended
      December 31, 2005 increased to 6.63% from 5.09% during the twelve months ended
      December 31, 2004. At December 31, 2005, the weighted average cost of borrowed
      funds was 7.26%. Stockholders’ equity increased 82% to $47.6 million at year-end
      2005 due to the Company’s common stock offering and the retention of net
      income.




***Revenues.*** Revenues
      increased by $44.2 million or 57%, to $121.4 million during 2005, from $77.2
      million during 2004. Revenues include interest income, purchase discount earned,
      prepayment penalties and other income and gains on sales of notes receivable,
      loans held for sale and OREO.




Interest
      income increased by $39.6 million or 67%, to $99.0 million during 2005 from
      $59.5 million during 2004. The increase in interest income reflected the
      significant increase in the portfolio of gross notes receivable and loans held
      for investment during the twelve months ended December 31, 2005 compared to
      the
      twelve months ended December 31, 2004.




59




Purchase
      discount earned increased by $2.0 million, or 21%, to $11.2 million during
      2005
      from $9.2 million during 2004. This increase resulted primarily from increased
      principal payments due both to the growth in our portfolio of notes receivable
      and increased prepayments during the year, which accelerated income recognition
      of the associated purchase discount compared with the twelve months ended
      December 31, 2004. We received $270.9 million of principal payments from notes
      receivable during 2005 compared with $209.2 million of principal payments during
      2004.




Gain
      on
      sale of notes receivable decreased by $390,000, or 23%, to $1.3 million during
      the twelve months ended December 31, 2005, from $1.7 million during the twelve
      months ended December 31, 2004. We sold a total of $13.6 million of performing
      notes receivable and a small net balance of the Company’s credit card
      receivables portfolio during the twelve months of 2005, as compared to a total
      of $21.0 million of predominantly performing loans during the same period last
      year.




Gain
      on
      sale of originated loans held for sale decreased by $167,000, or 12% to $1.3
      million during the twelve months ended December 31, 2005, from $1.4 million
      during the year 2004. This decrease reflected a 32% decrease in the principal
      amount of originated loans sold during the twelve months ended December 31,
      2005, to $60.7 million compared with $89.9 million during the twelve months
      ended 2004. The average gain on loans sold was 2.10% and 1.61%, respectively,
      during the twelve months ended December 31, 2005 and 2004. During the first
      part
      of 2004, our policy was to realize the gains associated with loan origination
      activities by selling substantially all of our originated loans into the
      secondary market. In mid-2004, we began to retain for portfolio most of the
      adjustable-rate loans that we originate.




Gain
      on
      sale of OREO increased by $1.2 million, or 224%, to $1.8 million during the
      twelve months ended December 31, 2005, from $542,000 during the twelve months
      ended December 31, 2004. We sold 487 OREO properties in the aggregate amount
      of
      $30.7 million during the twelve months of 2005, as compared to 290 OREO
      properties in the aggregate amount of $20.3 million during the twelve months
      of
      2004. The increase in the number of properties sold reflected the growth in
      our
      OREO inventory due to both an increase in foreclosures as our notes receivable
      portfolio grew and the purchase of loans during the past two years that were
      already in the foreclosure process.




Prepayment
      penalties and other income (late charges and other servicing fees) increased
      by
      $2.0 million or 42%, to $6.8 million during 2005 from $4.8 million during the
      corresponding period last year. This increase was primarily due to an increase
      in prepayment penalties received, as a result of accelerated loan pay offs
      during the twelve months ended December 31, 2005, as compared with the
      corresponding period in 2004. This was primarily attributable to the increased
      size of both our portfolio of purchased loans and loans held for investment,
      and
      continued low mortgage interest rates. Increased late charges resulting
      primarily from the growth in the size of our loan portfolios also contributed
      to
      the increase.




***Operating
      Expenses.*** Operating expenses increased by $45.1 million or 73% to $107.0 million during
      2005 from $61.9 million during 2004. Total operating expenses include interest
      expense, collection, general and administrative expenses, provisions for loan
      losses, amortization of deferred financing costs and depreciation
      expense.




Interest
      expense increased by $35.2 million, or 106%, to $68.3 million during the twelve
      months ended December 31, 2005, from $33.2 million during the year 2004. This
      increase was the result of the increase in total debt, which was $1.26 billion
      as of December 31, 2005 as compared with $845.1 million as of December 31,
      2004,
      which was used to fund the growth in total assets during the 2005 period. In
      addition, our average cost of funds during 2005 increased to 6.63% from 5.09%
      during 2004, reflecting the rise in short-term interest rates and its effect
      on
      our interest-rate sensitive borrowings.




60




Collection,
      general and administrative expenses increased by $6.9 million, or 32%, to $28.7
      million during 2005, from $21.8 million during 2004. Collection, general and
      administrative expenses as a percentage of average assets decreased from 3.20%
      during the twelve months ended December 31, 2004 to 2.59% during the twelve
      months ended December 31, 2005, reflecting the increase in total assets.
      Personnel expenses increased by $2.5 million, or 25%, and reflected an increase
      in the number of employees in certain areas in order to meet the demands of
      the
      Company’s significant asset growth, combined with expenses arising from
      restricted stock granted to certain members of senior management and severance
      for certain departed members of senior management. We ended 2005 with 216
      employees as compared to 166 at the end of 2004. Legal fees relating to
      increased activity with respect to foreclosures increased by $1.8 million,
      or
      75%, to $4.1 million from $2.4 million during the same period last year. This
      increase reflected increases in foreclosure activity as a result of a larger
      total portfolio of notes receivable and certain loans purchased in various
      stages of delinquency and foreclosure. Office expenses increased by $1.3
      million, or 112%, to $2.6 million during the year, from $1.2 million during
      the
      twelve months of 2004. This increase was primarily the result of $1.0 million
      of
      increased occupancy costs incurred during the twelve months of 2005 due, for
      the
      most part, to lease termination and other expenses incurred in connection with
      the relocation of administrative and operating functions to our new office
      facility in New Jersey. Certain costs directly related to successful loan
      acquisitions, previously deferred and amortized over the estimated life of
      the
      acquired assets, decreased by $322,000, or 14%, to $1.9 million during 2005
      from
      $2.2 million during 2004. All other general and administrative expenses,
      including insurance, various professional fees and licenses, maintenance and
      support for our computer systems, increased by $1.6 million, which is
      attributable to the growth of our business and the move to our new office
      facility.




The
      provision for loan losses increased by $1.0 million, or 28%, to $4.7 million
      during 2005, from $3.7 million during 2004. This increase was primarily due
      to
      reserve increases for the growing portfolio of loans originated by the Company’s
      Tribeca subsidiary, including an increase in Tribeca loan delinquencies, and
      specific portfolios of notes receivable acquired during 2004.




Amortization
      of deferred financing costs increased by $1.3 million, or 49%, to $4.1 million
      during 2005 from $2.8 million during 2004. This increase resulted primarily
      from
      the growth in notes payable (senior debt) to fund the expansion of the portfolio
      of loans acquired and originated, and the increased pace of loan portfolio
      prepayments during 2005 that caused a corresponding increase in the pay down
      of
      senior debt.




Depreciation
      expenses increased by $582,000, or 118%, to $1.1 million in 2005, principally
      due to leasehold improvements related to the Company’s new office facility in
      New Jersey and the addition and upgrading of computer hardware and
      software.




Our
      pre-tax income decreased by $868,000, or 6%, to $14.4 million during 2005 from
      $15.3 million during 2004 for the reasons set forth above.




During
      2005, the Company had a provision for income taxes of $6.6 million as compared
      to a provision of $6.9 million in 2004. Our effective tax rates for 2005 and
      2004 were 46% and 45%, respectively.




**Liquidity
      and Capital Resources**




***General***




During
      2006, we purchased 12,881 loans, consisting primarily of second mortgages,
      with
      an aggregate face value of $621.4 million at an aggregate purchase price of
      $572.0 million, or 92.1% of face value. During 2006, we originated $384.7
      million of loans through our origination subsidiary, Tribeca Lending
      Corporation. Originations are initially funded through borrowings under our
      warehouse facility, and loans originated for portfolio are subsequently funded
      with term debt under our Tribeca master credit facility after transfer from
      the
      warehouse facility. In the first quarter of 2006, Tribeca and certain of its
      subsidiaries entered into master credit and security agreements with each of
      our
      principal lender, Sky Bank, and BOS (USA) Inc., an affiliate of Bank of
      Scotland, the proceeds of which were used to refinance and consolidate certain
      term loans with our principal lender.




61




We
      have
      one principal source of external funding to meet our liquidity requirements,
      in
      addition to the cash flow provided from borrower payments of interest and
      principal on mortgage loans. See “-
      Borrowings.” In addition, we have the ability to sell loans in the secondary
      market. We sell pools of acquired mortgage loans and newly originated Liberty
      Loans from time to time, and we sell loans that we originate specifically for
      sale into the secondary market on a regular basis.




In
      December 2006, Sky Bank and Huntington Bancshares Inc. announced a pending
      merger, expected to close in the third quarter of 2007, pending regulatory
      and
      shareholder approvals. The combined bank, which will be the successor to our
      credit facilities provided by Sky Bank, will have approximately $54 billion
      in
      assets and will be the 24 th largest
      bank holding company headquartered in the United States.




As
      a
      result of the growth of the loan portfolios, management continues to explore
      potential additional sources of funding for financing portfolio acquisitions
      and
      loan originations. We have been evaluating the feasibility of securitizing
      certain acquired and originated loans in order to seek a lower cost funding
      alternative and possibly to reduce somewhat the short-term interest sensitivity
      of our borrowings. In addition, we have begun to seek additional term debt
      funding alternatives with banks and other financial institutions in order to
      expand our borrowing capabilities.




***Short-term
      Investments.*** The
      Company’s short-term investment portfolio includes U.S. treasury bills,
      investment-grade commercial paper and money market accounts. The Company’s
      investment policy is structured to provide an adequate level of liquidity in
      order to meet normal working capital needs and expansion of the loan portfolio.
      At December 31, 2006, the Company had short-term investments of $20.2
      million.




***Cost
      of Funds.*** As of
      December 31, 2006, we had total borrowings of $1.58 billion, of which $1.52
      billion was under our term loan facilities and an aggregate of $56.0 million
      was
      under our warehouse facilities. Substantially all of the debt under our term
      loan facilities was incurred in connection with the purchase and origination
      of,
      and is secured by, our acquired notes, originated loans held for investment
      and
      OREO portfolios. At December 31, 2006, approximately $5.5 million of our term
      debt accrues interest at a rate of prime plus a margin of 0.50% to 1.75%, $162.7
      million accrues interest at the FHLB 30-day LIBOR advance rate plus 2.30%,
      $137.8 million accrues interest at the FHLB 30-day LIBOR advance rate plus
      2.35%, $764.1 million accrues interest at the FHLB 30-day LIBOR advance rate
      plus 2.50%, $449.3 million accrues interest at the FHLB 30-day LIBOR advance
      rate plus 2.75%, $369,000 accrues interest at the FHLB 30-day LIBOR advance
      rate
      plus 3.375% and $866,000 accrues interest at the FHLB 30-day LIBOR advance
      rate
      plus 3.875%. Our warehouse facilities are utilized to fund Tribeca’s
      originations of loans and the acquisition of loans through our “Flow
      Acquisitions Group” pending sale to others or pending funding under our term
      debt facilities for loans to be held in portfolio. The interest rate on the
      warehouse debt was 7.75% at December 31, 2006, compared with a rate of 6.75%
      at
      December 31, 2005. At December 31, 2006, the weighted average interest rate
      on
      term debt was 7.99%. The weighted average interest rate on term debt at December
      31, 2005 and December 31, 2004 was 7.28% and 5.73%, respectively.





62





***Cash
      Flow from Operating, Investing and Financing
      Activities***




Liquidity
      represents our ability to obtain adequate funding to meet our financial
      obligations. Our liquidity position is affected by mortgage loan purchase and
      origination volume, mortgage loan payments, including prepayments, loan
      maturities and the amortization and maturity structure of borrowings under
      our
      term loan facilities. In accordance with the terms of our credit facilities
      with
      our lenders, we receive a cash allowance that is adequate to meet our operating
      expenses.




At
      December 31, 2006, we had cash and cash equivalents of $4.0 million compared
      with $3.9 million at December 31, 2005. Restricted cash of $32.7 million and
      $17.0 million at December 31, 2006 and 2005, respectively, was restricted under
      our credit agreements and lockbox facility with our lead lending bank, Sky
      Bank.




Substantially
      all of our assets are invested in our portfolios of notes receivable, loans
      held
      for investment, OREO and loans held for sale. Primary sources of our cash flow
      for operating and investing activities are borrowings under our various debt
      facilities, collections of interest and principal on notes receivable and loans
      held for investment and proceeds from sales of notes and OREO properties, and
      from time to time, sales of our newly originated loans that generally are held
      for investment. Primary uses of cash include purchases of notes receivable,
      originations of loans and for operating expenses. We rely significantly upon
      our
      lender and the other banks that participate in the loans made to us by our
      lender to provide the funds necessary for the purchase of notes receivable
      portfolios and the origination of loans. While we have historically been able
      to
      finance these purchases and originations, we have not had, at any time since
      our
      inception, committed loan facilities in significant excess of the amount we
      currently have outstanding under our credit facilities.




Net
      cash
      provided by operating activities was $334,000 during the twelve months ended
      December 31, 2006, compared with cash provided of $3.8 million during the twelve
      months ended December 31, 2005. The decrease in cash provided by operating
      activities during the twelve months ended December 31, 2006 was due primarily
      to
      a net increase in the volume of loans sold that were originated for sale, which
      was essentially offset by the decline in the Company’s net income of $9.6
      million, from net income of $7.9 million for the twelve months ended December
      31, 2005.




Net
      cash
      used in investing activities was $326.7 million in the twelve months ended
      December 31, 2006, compared to $428.2 million of cash used in the twelve months
      ended December 31, 2005. The decrease in cash used during the twelve months
      ended December 31, 2006 was primarily due to increases in principal collections
      of notes receivable and loans held for investment of $141.6 million and an
      increase in the proceeds from sale of loans held for investment of $57.9
      million, which was partially offset by an increase in the purchase of notes
      receivable of $103.7 million.




Net
      cash
      provided by financing activities decreased to approximately $326.5 million
      during the twelve months ended December 31, 2006, from $423.2 million provided
      during the twelve months ended December 31, 2005. The decrease resulted
      primarily from increased repayments of outstanding notes payable and financing
      agreements of $180.9 million (the result of increased prepayments of both notes
      receivable and loans held for investment), which was partially offset by
      increases in the proceeds from notes payable and financing agreements of $76.5
      million.




***Offering
      of Common Stock***




In
      early
      August 2005, we completed a public offering of 1,265,000 of shares of our common
      stock at a public offering price of $11.50 per share (including an exercise
      in
      full of the underwriter’s over allotment option to purchase 165,000 shares)
      pursuant to a registration statement that was declared effective by the
      Securities and Exchange Commission on July 19, 2005. The offering resulted
      in
      net proceeds to us and the addition to equity of approximately $12.6 million.
      As
      a result of the additional equity raised, in combination with retained earnings
      in 2005, total stockholders’ equity increased to $47.6 million at December 31,
      2005 compared with $26.1 million at December 31, 2004. In conjunction with
      the
      public offering, the Company’s common stock ceased to be quoted on the
      Over-the-Counter Bulletin Board under the symbol “FCSC” and commenced trading on
      The Nasdaq National Market under the symbol “FCMC.”




63




**Borrowings**




As
      of
      December 31, 2006, the Company owed an aggregate of $1.58 billion under several
      credit facilities with our lenders. These borrowings are shown in the Company’s
      financial statements as “Notes payable” (referred to as “term loans” herein) and
“Financing agreements” (referred to as the “Warehouse Facility” or “Warehouse
      Facilities” herein).




***Master
      Credit Facilities - Term Loans***




***General.*** ** In
      October 2004, the Company, and its finance subsidiaries, excluding Tribeca,
      entered into a master credit and security agreement (the “Franklin Master Credit
      Facility”) with Sky Bank, an Ohio banking corporation, which we refer to as our
      lender or Sky Bank. Under this master credit facility, we request term loans
      to
      finance the purchase of residential mortgage loans or refinance existing
      outstanding loans under this facility. The facility does not include a
      commitment to additional lendings, which are therefore subject to our lender’s
      discretion as well as any regulatory limitations to which our lender is subject.
      The facility has been extended by Sky Bank and currently expires on April 30,
      2007.




In
      February 2006, Tribeca and certain of its subsidiaries entered into the Tribeca
      Master Credit Facility with Sky Bank, pursuant to which certain Tribeca
      subsidiaries may borrow term loans to finance their origination of loans Tribeca
      previously financed under its warehouse line of credit with Sky Bank and
      consolidate and refinance prior term loans made by Sky Bank to such
      subsidiaries. The facility does not include a commitment for additional
      lendings, which is subject to our lender’s discretion, as well as any regulatory
      limitations to which Sky Bank is subject. The facility expires on February
      28,
      2008.




***Interest
      Rates and Fees.*** Interest
      on the term loans is payable monthly at a floating rate equal to the highest
      Federal Home Loan Bank of Cincinnati 30-day advance rate as published daily
      by
      Bloomberg under the symbol FHL5LBRI, or the “30-day advance rate,” plus the
      applicable margin in effect prior to August 2006 as follows:




**For
                Loans Funded****Prior
                to July 1, 2005**
            
            **On
                or After July 1, 2005**If
                the 30-day advance rate is
            
            the
                applicable margin is
            
            the
                applicable margin isLess
                than 2.26%
            
            350
                basis points
            
            300
                basis points2.26
                to 4.50%
            
            325
                basis points
            
            275
                basis pointsGreater
                than 4.50%
            
            300
                basis points
            
            250
                basis points





***August
      2006 Modifications to Sky Bank Financing Arrangements***




In
      August
      2006, the master credit facilities were modified to reduce the interest rate
      on
      all debt originated under the master credit facilities before July 1, 2005
      by 25
      basis points effective October 1, 2006. This rate was lowered by an additional
      25 basis points effective January 1, 2007.







64





***December
      2006 Modifications to Sky Bank Financing Arrangements***




In
      December 2006, the master credit facilities were modified to change the interest
      rate on term loans funded under the master credit facilities after November
      14,
      2006 for loans originated by Tribeca and purchases of second mortgages by the
      Company to the Federal Home Loan Bank of Cincinnati 30-day advance rate as
      published daily by Bloomberg under the symbol FHL5LBRI (the “30-day advance
      rate”), plus the applicable margin as follows:




If
                the 30-day advance rate is
            
            the
                applicable margin isLess
                than 2.26%
            
            300
                basis points2.26
                to 4.50%
            
            260
                basis pointsGreater
                than 4.50%
            
            235
                basis points





Additionally,
      the interest rate payable to Sky Bank on term loans funded under the Franklin
      Master Credit Facility after November 14, 2006 in respect of purchases of first
      mortgages by the Company will be the 30-day advance rate, plus the applicable
      margin as follows:




If
                the 30-day advance rate is
            
            the
                applicable margin isLess
                than 2.26%
            
            300
                basis points2.26
                to 4.50%
            
            225
                basis pointsGreater
                than 4.50%
            
            200
                basis points





As
      a
      result of these modifications, effective January 1, 2007, the interest rate
      on
      term borrowings under our Master Credit Facilities is based on a floating rate
      equal to the 30-day advance rate, plus the applicable margin as
      follows:




**For
                Loans Funded****Prior
                to November 15, 2006**
            
            **On
                or After November 15, 2006****Purchase
                of First Mortgages**
            
            **Tribeca
                Originated Loans/**
              **Second
                Mortgage Purchases**If
                the 30-day advance rate is
            
            the
                applicable margin is
            
            the
                applicable margin is
            
            the
                applicable margin isLess
                than 2.26%
            
            300
                basis points
            
            300
                basis points
            
            300
                basis points2.26
                to 4.50%
            
            275
                basis points
            
            225
                basis points
            
            260
                basis pointsGreater
                than 4.50%
            
            250
                basis points
            
            200
                basis points
            
            235
                basis points





Upon
      each
      closing of a loan after June 23, 2006, we are required to pay an origination
      fee
      equal to 0.50% of the amount of the loan unless otherwise agreed to by our
      lender. For loans funded between July 1, 2005 and June 23, 2006, under the
      Franklin Master Credit Facility, the origination fee paid was 0.75% of the
      amount of the loan (0.50% for loans funded under the Tribeca Master Credit
      Facility), and for loans funded prior to July 1, 2005, the origination fee
      paid
      was 1% of the amount of the loan unless otherwise agreed to by our
      lender.




***Principal;
      Prepayments; Termination of Commitments*** **.** The
      unpaid principal balance of each loan is amortized over a period of twenty
      years, but matures three years after the date the loan was made. Historically,
      our lender has agreed to extend the maturities of such loans for additional
      three-year terms upon their maturity. We are required to make monthly payments
      of the principal on each of our outstanding loans.




In
      the
      event there is a material and adverse breach of the representations and
      warranties with respect to a pledged mortgage loan that is not cured within
      30
      days after notice by our lender, we will be required to repay the loan with
      respect to such pledged mortgage loan in an amount equal to the price at which
      such mortgage loan could readily be sold (as determined by our
      lender).




65




***Covenants;
      Events of Default.*** The
      Master Credit Facilities contain affirmative, negative and financial covenants
      customary for financings of this type, including, among other things, a covenant
      under the Franklin Master Credit Facility that we and our subsidiaries together
      maintain a minimum net worth of at least $10 million; and, a covenant under
      the
      Tribeca Master Credit Facility that Tribeca and its subsidiaries, together,
      maintain a minimum net worth of at least $3.5 million and rolling four-quarter
      pre-tax net income of at least $750,000. These master credit facilities contain
      events of default customary for facilities of this type (with customary grace
      and cure periods, as applicable). Both Franklin and Tribeca are in compliance
      with such covenants as of December 31, 2006.




***Security*** **.** ****** Our
      obligations under the Franklin Master Credit facility are secured by a first
      priority lien on loans that are financed by proceeds of loans made to us under
      the facility. The collateral securing each loan cross-collateralizes all other
      loans made under this facility. In addition, pursuant to a lockbox arrangement,
      our lender is entitled to receive substantially all sums payable to us in
      respect of any of the collateral. Tribeca’s and its subsidiary borrowers’
obligations under the Tribeca Master Credit Facility are secured by a first
      priority lien on loans originated by Tribeca or such subsidiary that are
      financed or refinanced by proceeds of loans made to Tribeca or its borrowers
      under the facility. The collateral securing each loan cross-collateralizes
      all
      other loans made under this facility. In addition, pursuant to a lockbox
      arrangement, Sky Bank is entitled to receive substantially all sums payable
      to
      Tribeca and any subsidiary borrower in respect of any of the
      collateral.




***Elimination
      of Success Fees***




In
      June
      2006, the Company received from Sky Bank a letter (the “June Modification
      Letter”) modifying the Franklin Master Credit Facility between the Company and
      all of its subsidiaries other than Tribeca and the Tribeca Master Credit and
      Security Agreement among Tribeca, Sky Bank and certain subsidiaries of Tribeca.
      Pursuant to the June Modification Letter, Franklin and Tribeca will no longer
      be
      required to pay Sky Bank a success fee upon the successful payoff of term loans
      made on or after June 26, 2006 under the master credit facilities.




In
      December 2006, the Company, Tribeca and Sky Bank entered into an Amendment
      (the
“Amendment”) to the Franklin Master Credit Facility and the Tribeca Master
      Credit Facility (together with the Franklin Master Credit Facility, the “Master
      Credit Facilities”). Pursuant to the Amendment, Sky Bank agreed to the
      elimination of all success fee obligations under the Master Credit Facilities
      relating to term loans made before June 26, 2006, in consideration of the
      Company’s agreement to pay $4.5 million to Sky Bank. As a result of these
      amendments, neither the Company nor Tribeca will have any further success fee
      obligations upon payoff of term loans under any credit facilities.







66





***Bank
      of Scotland Term Loan***




In
      March
      2006, Tribeca and one of Tribeca’s subsidiaries (the “Tribeca Subsidiary
      Borrower”) entered into a $100 million Master Credit and Security Agreement (the
“BOS Loan”) with BOS (USA) Inc., an affiliate of Bank of Scotland. $98.2 million
      of proceeds of the BOS Loan were used to consolidate and refinance prior term
      loans made to certain Tribeca subsidiaries. Interest on the BOS Loan is
      payable monthly at a floating rate equal to the 30-day advance rate plus an
      applicable margin as follows:




If
                the 30-day advance rate is
            
            the
                applicable margin isLess
                than 2.26%
            
            300
                basis points2.26
                to 4.50%
            
            275
                basis pointsGreater
                than 4.50%
            
            250
                basis points





The
      unpaid principal balance of the BOS Loan will be amortized over a period of
      20
      years, but matures in March 2009. The Tribeca Subsidiary Borrower is required
      to
      make monthly amortization payments and payments of interest on the BOS
      Loan.




The
      facility contains affirmative, negative and financial covenants customary for
      financings of this type, including, among other things, covenants that require
      Tribeca and its subsidiaries, together, to maintain a minimum net worth of
      at
      least $3.5 million and rolling four-quarter pre-tax net income of $750,000.
      The
      facility contains events of default customary for facilities of this
      type.




Tribeca’s
      and the Tribeca subsidiary borrower’s obligations under the facility are secured
      by (i) a first priority lien on loans acquired by the Tribeca Subsidiary
      Borrower that are refinanced by the proceeds of the BOS Loan and (ii) a second
      priority lien on collateral securing loans made to Tribeca or its
      subsidiaries under the Tribeca Master Credit Facility described above. In
      addition, pursuant to a lockbox arrangement, BOS is entitled to receive
      substantially all sums payable to Tribeca and the Tribeca Subsidiary Borrower
      in
      respect of any of the primary collateral under the facility. Tribeca’s BOS Loan
      and the Tribeca Master Credit Facility are cross-collateralized.




***Warehouse
        Facilities***
  ***Tribeca
        Warehouse*** **.** In
        October 2005, Tribeca entered into a Warehousing Credit and Security Agreement
        (the “Tribeca Warehouse Facility”) with our lender, which replaced previous
        warehouse lending agreements. The agreement provides for an increased commitment
        to $60 million, and in April 2006, our lender extended the maturity date
        of the
        Warehousing Credit and Security Agreement to April 30, 2007.
  Interest
        on advances is payable monthly at a rate per annum equal to the greater of
        (i) a
        floating rate equal to the Wall Street Journal Prime Rate minus 50 basis
        points
        or (ii) 5%.
  The
        Tribeca Warehouse Facility is secured by a lien on all of the mortgage loans
        delivered to our lender or in respect of which an advance has been made as
        well
        as by all mortgage insurance and commitments issued by insurers to insure
        or
        guarantee pledged mortgage loans. Tribeca also assigns all of its rights
        under
        third-party purchase commitments covering pledged mortgages and the proceeds
        of
        such commitments and its rights with respect to investors in the pledged
        mortgages to the extent such rights are related to pledged mortgages. In
        addition, we have provided a guaranty of Tribeca’s obligations under the Tribeca
        Warehouse Facility, which is secured by substantially all of Tribeca’s personal
        property. As of December 31, 2006, Tribeca had approximately $22.5 million
        available under this facility.


67




***Flow
      Warehouse*** **.** In
      August
      2006, we entered into a new $40 million Flow Warehousing Credit and Security
      Agreement (the “Flow Warehouse Facility”) for a term of one year with our lender
      to accumulate loans acquired by the Company on a flow basis prior to
      consolidating such loans into term debt.




Interest
      on advances is payable monthly at a rate per annum equal to a floating rate
      equal to the Wall Street Journal Prime Rate minus 50 basis points.




The
      Flow
      Warehouse Facility is secured by a lien on all of the mortgage loans delivered
      to our lender or in respect of which an advance has been made as well as by
      all
      mortgage insurance and commitments issued by insurers to insure or guarantee
      pledged mortgage loans. The Company also assigns all of its rights under
      third-party purchase commitments covering pledged mortgages and the proceeds
      of
      such commitments and its rights with respect to investors in the pledged
      mortgages to the extent such rights are related to pledged mortgages. In
      addition, we have provided a guaranty of the Company’s obligations under the
      Flow Warehouse Facility, which is secured by substantially all our personal
      property. As of December 31, 2006, we had approximately $22.9 million available
      under this facility.




***Interest
      Rate Caps***




On
      August
      29, 2006, the Company purchased a $300 million (notional amount) one-month
      LIBOR
      cap with a strike price of 5.75% at a price of $101,000, and on August 30,
      2006,
      the Company purchased a $500 million (notional amount) one-month LIBOR cap
      with
      a strike price of 6.0% at a price of $60,000. Both cap agreements are
      non-amortizing and will be in effect for one year. The cap resets match the
      interest rate resets on a portion of the Company’s term debt. These caps will
      limit the Company's exposure to increased borrowing costs on $300 million of
      term debt should the 30-day LIBOR rate exceed 5.75%, and on a total of $800
      million of term debt should such rate exceed 6.0% . The
      interest rate caps are not designated as hedging instruments for accounting
      purposes; therefore, a change in the fair market value of the caps is recognized
      as gain or loss in earnings in the current period.




The
      following table presents the contract/notional and fair value amounts of all
      derivative transactions at December 31, 2006:




**Interest
                Rate Caps**
            
            **Notional
                Amount**
            
            **Expiration
                Date**
            
            **Premium
                Paid**
            
            **Fair
                Value**Cap
                1
            
            $
            300,000,000
            
            
            August
                31, 2007
            
            $
            101,000
            
            $
            14,881Cap
                2
            
            
            500,000,000
            
            
            August
                31, 2007
            
            
            60,000
            
            
            4,811Total
            
            $
            800,000,000
            
            
            
            
            $
            161,000
            
            $
            19,692








68





**Financing
      Activities and Contractual Obligations**




Below
      is
      a schedule of the Company’s contractual obligations and commitments at December
      31, 2006:




**Minimum
                Contractual Obligations**
              **(excluding
                interest)****Weighted
                Average**
              **Interest
                Rate**
              **As
                of 12/31/06**
            
            
            **Total**
            
            
            **Less
                Than 1 yr**
            
            
            **1
                - 3 yrs**
            
            
            **3
                - 5 yrs**
            
            
            **Thereafter**Contractual
                ObligationsNotes
                Payable
            
            
            7.99
            %
            $
            1,520,733,063
            
            $
            285,109,645
            
            $
            1,192,556,666
            
            $
            41,975,058
            
            $
            1,091,694Warehouse
                Lines
            
            
            7.75
            %
            
            55,962,315
            
            
            55,962,315
            
            
            -
            
            
            -
            
            
            -Repurchase
                Obligation
            
            
            
            
            
            18,094,061
            
            
            18,094,061
            
            
            -
            
            
            -
            
            
            -Operating
                LeasesRent
                Obligations
            
            
            -
            
            
            9,377,626
            
            
            1,350,229
            
            
            2,651,111
            
            
            2,620,866
            
            
            2,755,420Capital
                Lease Obligations
            
            
            -
            
            
            1,196,249
            
            
            382,351
            
            
            674,093
            
            
            139,805
            
            
            -Employment
                Agreements
            
            
            -
            
            
            2,137,500
            
            
            1,087,500
            
            
            1,050,000
            
            
            -
            
            
            -Total
                Contractual Cash Obligations
            
            
            
            
            $
            1,607,500,814
            
            $
            361,986,101
            
            $
            1,196,931,870
            
            $
            44,735,729
            
            $
            3,847,114





In
      January 2007, the Company repurchased $17.2 million of Liberty loans previously
      sold to investors. The Company recorded a liability at December 31, 2006 for
      a
      reserve for the estimated losses of $444,000.




Interest
      rates on our borrowings are indexed to the monthly Federal Home Loan Bank of
      Cincinnati 30-day LIBOR advance rate or Prime, as more fully described above,
      and accordingly will increase or decrease over time. Minimum contractual
      obligations are based on minimum required principal payments, including balloon
      maturities of loans under the master credit facility, the warehouse facility
      and
      the term loans. Actual payments will vary depending on actual cash collections
      and loan sales. Historically, our lender has extended the maturities and balloon
      payments, although there is no assurance that it will continue to do
      so.




**Safe
      Harbor Statement**




Statements
      contained herein that are not historical fact may be forward-looking statements
      within the meaning of Section 27A of the Securities Act of 1933, as amended,
      and
      Section 21E of the Securities Exchange Act of 1934, as amended, that are subject
      to a variety of risks and uncertainties. There are a number of important factors
      that could cause actual results to differ materially from those projected or
      suggested in forward-looking statements made by the Company. These factors
      include, but are not limited to: (i) unanticipated changes in the U.S. economy,
      including changes in business conditions such as interest rates, and changes
      in
      the level of growth in the finance and housing markets; (ii) the status of
      the
      Company’s relations with the Company’s principal lender and such lender’s
      willingness to extend credit to the Company; (iii) the availability for
      purchases of additional loans; (iv) the availability of subprime borrowers
      for
      the origination of additional loans; (v) changes in the statutes or regulations
      applicable to the Company’s business or in the interpretation and enforcement
      thereof by the relevant authorities; (vi) the status of the Company’s regulatory
      compliance; and (vii) other risks detailed from time to time in the Company’s
      SEC reports and filings. Additional factors that would cause actual results
      to
      differ materially from those projected or suggested in any forward-looking
      statements are contained in the Company’s filings with the Securities and
      Exchange Commission, including, but not limited to, those factors discussed
      under the captions “Risk Factors,” “Interest Rate Risk” and “Real Estate Risk”
in the Company’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q,
      which the Company urges investors to consider. The Company undertakes no
      obligation to publicly release the revisions to such forward-looking statements
      that may be made to reflect events or circumstances after the date hereof or
      to
      reflect the occurrences of unanticipated events, except as otherwise required
      by
      securities, and other applicable laws. Readers are cautioned not to place undue
      reliance on these forward-looking statements, which speak only as of the date
      hereof. The Company undertakes no obligation to release publicly the results
      on
      any events or circumstances after the date hereof or to reflect the occurrence
      of unanticipated events.




69




**ITEM
                7A.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**




We
      are
      exposed to various types of market risk in the normal course of business,
      including the impact of interest rate changes and changes in corporate tax
      rates. A material change in these rates could adversely affect our operating
      results and cash flows.




**Interest
      Rate Risk**




Interest
      rate fluctuations can adversely affect our operating results and present a
      variety of risks, including the risk of a mismatch between the repricing of
      interest-earning assets and borrowings, variances in the yield curve and
      changing prepayment rates on notes receivable, loans held for investment and
      loans held for sale.




Interest
      rates are highly sensitive to many factors, including governmental monetary
      policies and domestic and international economic and political conditions.
      Conditions such as inflation, recession, unemployment, money supply and other
      factors beyond our control may also affect interest rates. Fluctuations in
      market interest rates are neither predictable nor controllable and may have
      a
      material adverse effect on our business, financial condition and results of
      operations.




The
      Company’s operating results will depend in large part on differences between the
      interest earned on its assets and the interest paid on its borrowings. Most
      of
      the Company’s assets, consisting primarily of mortgage notes receivable,
      generate fixed returns and have remaining contractual maturities in excess
      of
      five years, while the majority of originated loans held for investment generate
      fixed returns for the first two years and six-month adjustable returns
      thereafter. We fund the origination and acquisition of these assets with
      borrowings, which have interest rates that are based on the monthly Federal
      Home
      Loan Bank of Cincinnati (“FHLB”) 30-day advance rate. In most cases, the
      interest income from our assets will respond more slowly to interest rate
      fluctuations than the cost of our borrowings, creating a mismatch between
      interest earned on our interest-yielding assets and the interest paid on our
      borrowings. Consequently, changes in interest rates, particularly short-term
      interest rates, will significantly impact our net interest income and,
      therefore, net income. Our borrowings bear interest at rates that fluctuate
      with
      the FHLB Bank of Cincinnati 30-day advance rate or, to a lesser extent, the
      prime rate. Based on approximately $1.58 billion of borrowings under term loan
      and warehouse facilities outstanding at December 31, 2006, a 1% instantaneous
      and sustained increase in both FHLB and prime rates could increase quarterly
      interest expense by as much as approximately $3.9 million, pre-tax, which would
      negatively impact our quarterly after-tax net income. Due to our
      liability-sensitive balance sheet, increases in these rates will decrease both
      net income and the market value of our net assets. During the period from
      January 1, 2007 to August 31, 2007, the offsetting benefit of the Company’s
      interest rate caps could reduce the quarterly negative impact of a 1%
      instantaneous and sustained increase in both FHLB and prime rates by
      approximately $913,000, pre-tax.




The
      value
      of our assets may be affected by prepayment rates on investments. Prepayment
      rates are influenced by changes in current interest rates and a variety of
      economic, geographic and other factors beyond our control. Consequently, such
      prepayment rates cannot be predicted with certainty. When we originate and
      purchase mortgage loans, we expect that such mortgage loans will have a measure
      of protection from prepayment in the form of prepayment lockout periods or
      prepayment penalties. In periods of declining mortgage interest rates,
      prepayments on mortgages generally increase. If general interest rates decline
      as well, the proceeds of such prepayments received during such periods are
      likely to be reinvested by us in assets yielding less than the yields on the
      investments that were prepaid. In addition, the market value of mortgage
      investments may, because of the risk of prepayment, benefit less from declining
      interest rates than other fixed-income securities. Conversely, in periods of
      rising interest rates, prepayments on mortgages generally decrease, in which
      case we would not have the prepayment proceeds available to invest in assets
      with higher yields. Under certain interest rate and prepayment scenarios we
      may
      fail to recoup fully our cost of acquisition of certain
      investments.




70




**Real
      Estate Risk**




Residential
      property values are subject to volatility and may be affected adversely by
      a
      number of factors, including, but not limited to, national, regional and local
      economic conditions, which may be adversely affected by industry slowdowns
      and
      other factors; local real estate conditions (such as the supply of housing
      or
      the rapid increase in home values). Decreases in property values reduce the
      value of the collateral and the potential proceeds available to a borrower
      to
      repay our mortgage loans, which could cause us to suffer losses on the ultimate
      disposition of foreclosed properties.




We
      purchase and originate principally fixed and adjustable rate residential
      mortgage loans, which are secured primarily by the underlying single-family
      properties. Because the vast majority of our loans are to non-prime borrowers,
      delinquencies and foreclosures are substantially higher than those of prime
      mortgage loans, and if not serviced actively and effectively could result in
      an
      increase in losses on dispositions of properties acquired through foreclosure.
      In addition, a decline in real estate values would reduce the value of the
      residential properties securing our loans, which could lead to an increase
      in
      borrower defaults, reductions in interest income and increased losses on the
      disposition of foreclosed properties.




**ITEM
                8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATA**




The
      financial statements required by this Item are included herein, beginning on
      page F-2 of this report.




**ITEM
                9.**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**




None.





71




**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES**




**Disclosure
      Controls and Procedures**




As
      of
      December 31, 2006, the end of the period covered by this Annual Report on Form
      10-K, the Company’s management, including the Company’s Chief Executive Officer,
      Chief Financial Officer and Controller, evaluated the effectiveness of the
      Company’s disclosure controls and procedures, as such term is defined in Rule
      13a-15(e) promulgated under the Securities Exchange Act of 1934. Based on that
      evaluation, the Company’s Chief Executive Officer and Chief Financial Officer
      concluded that, as of December 31, 2006, the Company’s disclosure controls and
      procedures over financial reporting were effective.




**Changes
      in Internal Controls over Financial Reporting**




As
      previously disclosed in Note 2 of the Consolidated Financial Statements included
      in the Company’s Annual Report on Form 10-K for the fiscal year ended December
      31, 2005 and further described in Item 9A. of such Annual Report, the Company
      had identified material weaknesses as defined by the Public Company Accounting
      Oversight Board (United States) with respect to certain accounting and reporting
      matters. In connection with the Company’s 2005 Annual Report on Form 10-K, the
      Company restated its previously issued financial statements for the years 2004
      and 2003, for the first three quarters in 2005 and the quarterly periods in
      2004. The Company has also strengthened its accounting department in order
      to
      remedy the identified material weaknesses. During the fourth fiscal quarter
      of
      2006, the Company’s management determined that such material weaknesses had been
      remediated. There were no other changes in the Company’s internal control over
      financial reporting during the Company’s fourth fiscal quarter ended December
      31, 2006 that have materially affected, or are reasonably likely to materially
      affect, the Company’s internal control over financial
      reporting.




**ITEM
                9B.**
            **OTHER
                INFORMATION**




None.







72





**PART
      III**




**ITEM
                10.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT**




Information
      required under this Item is contained in the Company’s definitive proxy
      statement, which will be filed within 120 days of December 31, 2006, the
      registrant’s most recent fiscal year, and is incorporated herein by
      reference.




**ITEM
                11.**
            **EXECUTIVE
                COMPENSATION**




Information
      required under this Item is contained in the Company’s definitive proxy
      statement, which will be filed within 120 days of December 31, 2006, the
      registrant’s most recent fiscal year, and is incorporated herein by
      reference.




**ITEM
                12.**
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS**




Information
      required under this Item is contained in the Company’s definitive proxy
      statement, which will be filed within 120 days of December 31, 2006, the
      registrant’s most recent fiscal year, and is incorporated herein by
      reference.




**ITEM
                13.**
            **CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS**




Information
      required under this Item is contained in the Company’s definitive proxy
      statement, which will be filed within 120 days of December 31, 2006, the
      registrant’s most recent fiscal year, and is incorporated herein by
      reference.




**ITEM
                14.**
            **PRINCIPAL
                ACCOUNTANT FEES AND
                SERVICES**




Information
      required under this Item is contained in the Company’s definitive proxy
      statement, which will be filed within 120 days of December 31, 2006, the
      registrant’s most recent fiscal year, and is incorporated herein by
      reference.





73





**PART
      IV**





**ITEM
                15.**
            **EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES**




A.
            The
                following documents are filed as part of Form
                10-K:




(1)
            Financial
                Statements.




The
      financial statements required by Item 8 are included herein, beginning on page
      F-2 of this report.




(2)
            Financial
                Statement Schedules.




All
      financial statement schedules for which provision is made in the applicable
      accounting regulation of the Securities and Exchange Commission are not required
      under the related instructions or are inapplicable and therefore have been
      omitted.




B.
            Exhibits.




ExhibitNumber3.1
            
            Fifth
                Amended and Restated Certificate of Incorporation. Incorporated by
                reference to Appendix A to the Registrant’s Definitive Information
                Statement on Schedule 14C, filed with the Securities and Exchange
                Commission (the “Commission”) on January 20, 2005.3.2
            
            Amended
                and Restated By-laws. Incorporated by reference to Appendix B to
                the
                Registrant’s Definitive Information Statement on Schedule 14C, filed with
                the Commission on January 20, 2005.10.1
            
            Master
                Credit and Security Agreement, dated as of October 13, 2004, between
                the
                Registrant and Sky Bank (the “Master Credit Agreement”). Incorporated by
                reference to Exhibit 10.1 to the Registrant’s Registration Statement on
                Form S-1 (File No. 333-125681), filed with the Commission on June
                9, 2005
                (the “Registration Statement”).10.2
            
            Amendment
                to the Master Credit Agreement, dated as of December 30, 2004 between
                the
                Registrant and Sky Bank. Incorporated by reference to Exhibit 10.2
                to the
                Registrant’s Annual Report on Form 10-K for the fiscal year ended December
                31, 2004, filed with the Commission on April 8, 2005 (the “2004
                10-K”).10.3
            
            Warehousing
                Credit and Security Agreement, dated as of September 30, 2003, between
                Tribeca Lending Corp. and Sky Bank (the “Warehouse Credit Agreement”).
                Incorporated by reference to Exhibit 10.3 to the 2004
                10-K.10.4
            
            Letter,
                dated as of March 24, 2005, from Sky Bank to Tribeca Lending Corp.
                Incorporated by reference to Exhibit 10.4 to the 2004
                10-K.10.5
            
            Second
                Amendment to the Warehouse Credit Agreement, effective as of May
                19, 2005,
                between Tribeca Lending Corp. and Sky Bank. Incorporated by reference
                to
                Exhibit 10.5 to the Registration Statement.10.6
            
            Form
                of Term Loan and Security Agreement between subsidiaries of Tribeca
                Lending Corp. and Sky Bank. Incorporated by reference to Exhibit
                10.5 to
                the 2004 10-K.




74




10.7
            
            Agreement,
                dated March 20, 1997, between the Registrant and Sky Bank (f/k/a
                The
                Citizens Banking Registrant) (the “1997 Agreement”). Incorporated by
                reference to Exhibit 10(e) to the Registrant’s Annual Report on Form
                10-KSB for the fiscal year ended December 31, 1997, filed with the
                Commission on May 14, 1998.10.8
            
            Modification
                to 1997 Agreement, dated March 19, 2003, between the Registrant and
                Sky
                Bank. Incorporated by reference to Exhibit 10.8 to the Registration
                Statement.10.9
            
            1996
                Stock Incentive Plan, as amended. Incorporated by reference to Exhibit
                4.1
                to the Registrant’s Registration Statement on Form S-8 (File No.
                333-122677), filed with the Commission on February 10,
                2005.10.10
            
            Mortgage
                Loan Purchase and Sale Agreement, dated as of September 24, 2004,
                between
                the Registrant and Master Financial, Inc. Incorporated by reference
                to
                Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with
                the Commission on October 20, 2004.10.11
            
            Mortgage
                Loan Purchase and Sale Agreement, dated as of June 30, 2004, between
                the
                Registrant and Bank One, Inc. Incorporated by reference to Exhibit
                2.1 to
                the Registrant’s Current Report on Form 8-K/A, filed with the Commission
                on July 16, 2004.10.12
            
            Registration
                Rights Agreement, effective as of October 1, 2004, between the Registrant
                and Jeffrey R. Johnson. Incorporated by reference to Exhibit 10.10
                to the
                2004 10-K.10.13
            
            Restricted
                Stock Grant Agreement, dated as of October 4, 2004, between the Registrant
                and Jeffrey R. Johnson. Incorporated by reference to Exhibit 10.11
                to the
                2004 10-K.10.14
            
            Sublease
                Agreement, dated as of March 4, 2005, between the Registrant and
                Lehman
                Brothers Holdings Inc. Incorporated by reference to Exhibit 10.12
                to the
                2004 10-K.10.15
            
            Employment
                Agreement, effective as of March 28, 2005, between the Registrant
                and Paul
                D. Colasono. Incorporated by reference to Exhibit 10.1 to the Registrant’s
                Quarterly Report on Form 10-Q for the quarterly period ended March
                31,
                2005, filed with the Commission on May 16, 2005 (the “First Quarter
                10-Q”).10.16
            
            Restricted
                Stock Grant Agreement, dated as of April 13, 2005, between the Registrant
                and Paul D. Colasono. Incorporated by reference to Exhibit 10.2 to
                the
                First Quarter 10-Q.10.17
            
            Employment
                Agreement, dated as of June 7, 2005, between the Registrant and Joseph
                Caiazzo. Incorporated by reference to Exhibit 10.1 to the Registrant’s
                Current Report on Form 8-K, filed with the Commission on June 9,
                2005.10.18
            
            Warrant
                Agreement, dated as of April 24, 1997, between the Registrant and
                Steven
                W. Lefkowitz. Incorporated by reference to Exhibit 10.19 to Amendment
                No.
                1 to the Registration Statement, filed with the Commission on June
                29,
                2005.10.19
            
            Letter,
                dated as of July 19, 2005, from Sky Bank to the Registrant. Incorporated
                by reference to Exhibit 10.20 to Amendment No. 2 to the Registration
                Statement, filed with the Commission on July 19, 2005 (“Amendment No.
                2”).10.20
            
            Letter,
                dated as of July 19, 2005, from Sky Bank to Tribeca Lending Corp.
                Incorporated by reference to Exhibit 10.21 to Amendment No.
                2.




75




10.21
            
            Underwriting
                Agreement, dated July 19, 2005, between the Registrant and Ryan Beck
&
                Co., Inc. Incorporated by reference to Exhibit 10.3 to the Registrant’s
                Current Report on Form8-K,
                filed with the Commission on July 20, 2005.10.22
            
            Lease,
                dated July 27, 2005, between the Registrant and 101 Hudson Leasing
                Associates. Incorporated by reference to Exhibit 10.1 to the Registrant’s
                Current Report on Form 8-K, filed with the Commission on July 29,
                2005.10.23
            
            Separation
                Agreement, dated as of January 13, 2006, between the Registrant and
                Jeffrey R. Johnson. Incorporated by reference to Exhibit 10.23 to
                the
                Registrant’s Annual Report on Form 10-K for the fiscal year ended December
                31, 2005, filed with the Commission on
              April
                25, 2006 (the “2005 10-K”).10.24
            
            Master
                Credit and Security Agreement, dated as of February 28, 2006, among
                Tribeca Lending Corp., Sky Bank and those subsidiaries of Tribeca
                Lending
                Corp. listed on the signature page to the agreement. Incorporated
                by
                reference to Exhibit 10.24 to the 2005
              10-K.10.25
            
            Master
                Credit and Security Agreement, dated as of March 24, 2006, among
                Tribeca
                Lending Corp., BOS (USA) Inc. and those subsidiaries of Tribeca Lending
                Corp. listed on the signature page to the agreement. Incorporated
                by
                reference to Exhibit 10.25 to the 2005
              10-K.10.26
            
            Employment
                Agreement, dated as of March 1, 2006, between the Registrant and
                Alexander
                Gordon Jardin. Incorporated by reference to Exhibit 10.26 to the
                Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
                June 30, 2006, filed with the Commission on August 14,
                2006.10.27
            
            Franklin
                Credit Management Corporation 2006 Stock Incentive Plan. Incorporated
                by
                reference to Exhibit 99.1 of the Registrant’s Revised Definitive Proxy
                Statement on Schedule 14A, filed with the Commission on May 3, 2006.10.28
            
            Restricted
                Stock Grant Agreement, dated as of June 15, 2006, between the Registrant
                and Alexander Gordon Jardin. Incorporated by reference to Exhibit
                10.28 to
                the Registrant’s Quarterly Report on Form 10-Q for the quarterly period
                ended June 30, 2006, filed with the Commission on August 14,
                2006.10.29
            
            Modification
                Letter dated as of June 27, 2006, from Sky Bank to the Registrant.
                Incorporated by reference to Exhibit 10.1 of the Registrant’s current
                report on Form 8-K, filed with the Commission on August 8, 2006.10.30
            
            Employment
                Agreement dated as of February 1, 2006 between the Registrant and
                William
                Sullivan. Incorporated by reference to Exhibit 10.30 to the Registrant’s
                Quarterly Report on Form 10-Q for the quarterly period ended September
                30,
                2006, filed with the Commission on November 14, 2006.10.31
            
            Flow
                Warehousing Credit and Security Agreement dated August 10, 2006 between
                the Registrant and Sky Bank. Incorporated by reference to Exhibit
                10.31 to
                the Registrant’s Quarterly Report on Form 10-Q for the quarterly period
                ended September 30, 2006, filed with the Commission on November 14,
                2006.




76




10.32
            
            Rate
                Cap Transaction Agreement dated August 29, 2006 between LaSalle Bank
                National Association and the Registrant. Incorporated by reference
                to
                Exhibit 10.32 to the Registrant’s Quarterly Report on Form 10-Q for the
                quarterly period ended September 30, 2006, filed with the Commission
                on
                November 14, 2006.10.33
            
            Interest
                Rate Cap Transaction Agreement dated September 11, 2006 between HBOS
                Treasury Services and the Registrant. Incorporated by reference to
                Exhibit
                10.33 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly
                period ended September 30, 2006, filed with the Commission on November
                14,
                2006.10.34
            
            Modification
                Letter dated as of August 2, 2006, from Sky Bank to the Registrant.
                Incorporated by reference to Exhibit 10.2 of the Registrant's current
                report on Form 8-K,filed
                with the Commission on August 8, 2006.10.35
            
            Amendment
                No.1 to Master Credit and Security Agreements, dated as of December
                1,
                2006, between the Registrant, Tribeca Lending Corporation and Sky
                Bank.
                Incorporated by reference to Exhibit 10.1 to the Registrant’s Current
                Report on Form 8-K, filed with the Commission on December 19,
                2006.10.36
            
            Modification
                Letter, dated as of December 12, 2006, from Sky Bank to the Registrant.
                Incorporated by reference to Exhibit 10.2 to the Registrant’s Current
                Report on Form 8-K, filed with the Commission on December 19,
                2006.10.37*
            
            Asset
                Purchase and Sale Agreement, dated as of February 14, 2007, between
                The
                New York Mortgage Company, LLC, as Seller, and Tribeca Lending Corp.,
                as
                Buyer.10.38*
            
            Employment
                Agreement, dated as of February 22, 2007, between the Registrant
                and
              Richard
                W. Payne III.10.39*
            
            Assignment
                and Assumption of Lease Landlord Consent and Lease Modification Agreement,
                dated as of February 22, 2007, among The New York Mortgage Company,
                LLC,
                Tribeca Lending Corp., and First States Investors 5200
                LLC.21.1*
            
            Subsidiaries
                of the Registrant.23.1*
            
            Consent
                of Independent Registered Public Accounting Firm.31.1*
            
            Rule
                13a-14(a) Certification of Chief Executive Officer of the Registrant
                in
                accordance with Section 302 of the Sarbanes-Oxley Act of
                2002.31.2*
            
            Rule
                13a-14(a) Certification of Chief Financial Officer of the Registrant
                in
                accordance with Section 302 of the Sarbanes-Oxley Act of
                2002.32.1*
            
            Certification
                of Chief Executive Officer of the Registrant in accordance with Section
                906 of the Sarbanes-Oxley Act of 2002.32.2*
            
            Certification
                of Chief Financial Officer of the Registrant in accordance with Section
                906 of the Sarbanes-Oxley Act of
                2002.




Filed
      herewith.











77




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15 (d) of the Securities Exchange Act
      of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.


FRANKLIN
              CREDIT
              MANAGEMENT CORPORATIONMarch
              30, 2007
            By:
            /s/ ALEXANDER
              GORDON JARDINChief
              Executive Officer




Pursuant
      to the requirements of the Securities Exchange Act, this report has been signed
      below by the following persons on behalf of the registrant and in the capacity
      and on the dates indicated.


Signature
                
                Title
                
                Date/s/
                    THOMAS J. AXONThomas
                    J. Axon
                
                President
                    and Chairman of the Board
                
                March
                    30, 2007/s/
                    A. GORDON JARDINA.
                    Gordon Jardin
                
                Chief
                    Executive Officer
                
                March
                    30, 2007(Principal
                    Executive Officer)/s/
                    PAUL D. COLASONOPaul
                    D. Colasono
                
                Executive
                    Vice President
                
                March
                    30, 2007and
                    Chief Financial Officer(Principal
                    Financial Officer)/s/
                    WILLIAM F. SULLIVANWilliam
                    F. Sullivan
                
                Chief
                    Operating Officer
                
                March
                    30, 2007/s/
                    KIMBERLEY SHAWKimberley
                    Shaw
                
                Vice
                    President and Treasurer
                
                March
                    30, 2007(Controller)/s/
                    MICHAEL BERTASHMichael
                    Bertash
                
                Director
                
                March 
                    30, 2007/s/
                    ROBERT CHISTERobert
                    Chiste
                
                Director
                
                March
                    30,  2007/s/
                    FRANK EVANSFrank
                    Evans
                
                Director
                
                March
                    30, 2007/s/
                    STEVEN LEFKOWITZSteven
                    Lefkowitz
                
                Director
                
                March
                    30, 2007/s/
                    ALLAN R. LYONSAllan
                    R. Lyons
                
                Director
                
                March
                    30, 2007











**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**




**TABLE
      OF CONTENTS**




**Page**Report
                of Independent Registered Public Accounting FirmConsolidated
              Financial Statements:Consolidated
                Balance Sheets at December 31, 2006 and 2005
            F-2Consolidated
                Statements of Income for the years ended December 31, 2006, 2005and
                2004
            F-3Consolidated
                Statements of Stockholders’ Equity for the years ended December 31, 2006,2005
                and 2004
            F-4Consolidated
                Statements of Cash Flows for the years ended December 31, 2006,2005
                and 2004
            F-5Notes
              to Consolidated Financial Statements
            F-7









REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To
        the
        Board of Directors and Stockholders of


Franklin
      Credit Management Corporation


Jersey
      City, New Jersey




We
      have
      audited the accompanying consolidated balance sheets of Franklin Credit
      Management Corporation and subsidiaries (the “Company”) as of December 31, 2006
      and 2005, and the related consolidated statements of income, stockholders’
equity, and cash flows for each of the three years in the period ended December
      31, 2006. These financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits included consideration of internal control
      over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.




In
      our
      opinion, such consolidated financial statements present fairly, in all material
      respects, the financial position of Franklin Credit Management Corporation
      and
      subsidiaries as of December 31, 2006 and 2005, and the results of their
      operations and their cash flows for each of the three years in the period ended
      December 31, 2006, in conformity with accounting principles generally accepted
      in the United States of America.




As
      discussed in Note 2, the Company changed its method of accounting for certain
      purchased notes receivable as of January 1, 2005.




/s/ Deloitte
              & Touche LLPNew
              York, New YorkMarch
                30, 2007









**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
        BALANCE SHEETS


DECEMBER
      31, 2006 AND 2005





**2006**
            
            
            **2005****ASSETS**Cash
                and cash equivalents
            
            $
            3,983,104
            
            $
            3,886,506Restricted
                cash
            
            
            32,689,154
            
            
            21,560,752Short-term
                investments
            
            
            20,311,193
            
            
            16,954,019Notes
                Receivable:Principal
            
            
            1,174,039,567
            
            
            934,657,413Purchase
                discount
            
            
            (12,423,746
            )
            
            (17,809,940
            )Allowance
                for loan losses
            
            
            (52,424,375
            )
            
            (67,276,155
            )Net
                notes receivable
            
            
            1,109,191,446
            
            
            849,571,318Originated
                loans held for sale
            
            
            4,114,284
            
            
            12,844,882Originated
                loans held for investment, net
            
            
            422,682,795
            
            
            372,315,935Accrued
                interest receivable
            
            
            22,010,027
            
            
            13,341,964Other
                real estate owned
            
            
            22,977,725
            
            
            19,936,274Deferred
                financing costs, net
            
            
            10,622,961
            
            
            10,008,473Other
                receivables
            
            
            6,614,386
            
            
            7,309,505Building,
                furniture and equipment, net
            
            
            3,715,908
            
            
            4,029,481Income
                tax receivable
            
            
            8,594,119
            
            
            516,821Other
                assets
            
            
            850,897
            
            
            516,762Total
                assets
            
            $
            1,668,357,999
            
            $
            1,332,792,692**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Liabilities:Notes
                payable, net of debt discount of $515,799 in 2006 and$3,002,767
                in 2005
            
            $
            1,520,217,264
            
            $
            1,203,880,994Financing
                agreements
            
            
            55,962,315
            
            
            57,284,085Accounts
                payable and accrued expenses
            
            
            22,875,527
            
            
            17,524,057Repurchase
                obligation
            
            
            18,094,061
            
            
            -Success
                fee liability
            
            
            -
            
            
            5,721,918Deferred
                tax liability
            
            
            3,655,483
            
            
            787,470Total
                liabilities
            
            
            1,620,804,650
            
            
            1,285,198,524Commitments
                and ContingenciesStockholders’
                Equity:Preferred
                stock, $.01 par value; authorized 3,000,000; issued - none
            
            
            -
            
            
            -Common
                stock and additional paid-in capital, $.01 par value, 22,000,000
                authorized shares; issued and outstanding: 8,025,295 in 2006 and
                7,539,295
                in 2005
            
            
            22,715,180
            
            
            21,292,252Retained
                earnings
            
            
            24,838,169
            
            
            26,599,207Unearned
                compensation
            
            
            -
            
            
            (297,291
            )Total
                stockholders’ equity
            
            
            47,553,349
            
            
            47,594,168Total
                liabilities and stockholders’ equity
            
            $
            1,668,357,999
            
            $
            1,332,792,692


See
          Notes
          to Consolidated Financial Statements.
 
 F-2


**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF INCOME


YEARS
      ENDED DECEMBER 31, 2006, 2005 and 2004





**2006**
            
            **2005**
            
            **2004**REVENUES:Interest
                income
            
            $
            141,857,267
            
            $
            99,046,543
            
            $
            59,481,422Purchase
                discount earned
            
            
            8,924,838
            
            
            11,214,721
            
            
            9,234,896Gain
                on sale of notes receivable
            
            
            163,911
            
            
            1,310,887
            
            
            1,701,113Gain
                on sale of originated loans
            
            
            1,871,633
            
            
            1,276,566
            
            
            1,444,037Gain
                on sale of other real estate owned
            
            
            1,918,822
            
            
            1,758,351
            
            
            542,202Prepayment
                penalties and other income
            
            
            9,016,614
            
            
            6,792,146
            
            
            4,787,388Total
                revenues
            
            
            163,753,085
            
            
            121,399,214
            
            
            77,191,058OPERATING
                EXPENSES:Interest
                expense
            
            
            113,073,332
            
            
            68,329,965
            
            
            33,166,815Collection,
                general and administrative
            
            
            38,286,150
            
            
            28,700,133
            
            
            21,752,591Provision
                for loan losses
            
            
            9,750,393
            
            
            4,745,126
            
            
            3,705,333Amortization
                of deferred financing costs
            
            
            4,568,744
            
            
            4,105,218
            
            
            2,761,476Depreciation
            
            
            1,164,005
            
            
            1,077,296
            
            
            494,890Total
                expenses
            
            
            166,842,624
            
            
            106,957,738
            
            
            61,881,105(LOSS)/INCOME
                BEFORE PROVISION
              FOR
                INCOME TAXES
            
            
            (3,089,539
            )
            
            14,441,476
            
            
            15,309,953INCOME
                TAX (BENEFIT)/PROVISION
            
            
            (1,328,501
            )
            
            6,572,701
            
            
            6,943,345NET
                (LOSS)/INCOME
            
            $
            (1,761,038
            )
            $
            7,868,775
            
            $
            8,366,608NET
                (LOSS)/INCOME PER COMMON SHARE:Basic
            
            $
            (0.23
            )
            $
            1.19
            
            $
            1.41Diluted
            
            $
            (0.23
            )
            $
            1.09
            
            $
            1.25WEIGHTED
                AVERAGE NUMBER OF SHARESOutstanding,
                basic
            
            
            7,692,233
            
            
            6,629,108
            
            
            5,926,878Diluted
                potential common shares
            
            
            -
            
            
            574,664
            
            
            767,844Outstanding,
                diluted
            
            
            7,692,233
            
            
            7,203,772
            
            
            6,694,722


See
          Notes
          to Consolidated Financial Statements.
 
 F-3


**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY


YEARS
      ENDED DECEMBER 31, 2006, 2005 and 2004





**Common
                Stock and**
              **Additional
                Paid-in Capital**
            
            **Retained**
            
            **Unearned****Shares**
            
            **Amount**
            
            **Earnings**
            
            **Compensation**
            
            **Total**BALANCE,
                JANUARY 1, 2004
            
            
            5,916,527
            
            $
            7,045,135
            
            $
            10,363,824
            
            $
            -
            
            $
            17,408,959Issuance
                of common and restricted stock
            
            
            120,768
            
            
            1,230,006
            
            
            -
            
            
            (1,099,000
            )
            
            131,006Exercise
                of options
            
            
            25,000
            
            
            18,750
            
            
            -
            
            
            -
            
            
            18,750Issuance
                of in-the-money stock options
            
            
            -
            
            
            220,510
            
            
            -
            
            
            -
            
            
            220,510Net
                income
            
            
            -
            
            
            -
            
            
            8,366,608
            
            
            -
            
            
            8,366,608BALANCE,
                DECEMBER 31, 2004
            
            
            6,062,295
            
            
            8,514,401
            
            
            18,730,432
            
            
            (1,099,000
            )
            
            26,145,833Stock
                offering, net
            
            
            1,265,000
            
            
            12,592,616
            
            
            -
            
            
            -
            
            
            12,592,616Exercise
                of options
            
            
            221,000
            
            
            224,785
            
            
            -
            
            
            -
            
            
            224,785Restricted
                stock activity
            
            
            (9,000
            )
            
            (39,550
            )
            
            -
            
            
            801,709
            
            
            762,159Net
                income
            
            
            -
            
            
            -
            
            
            7,868,775
            
            
            -
            
            
            7,868,775BALANCE,
                DECEMBER 31, 2005
            
            
            7,539,295
            
            
            21,292,252
            
            
            26,599,207
            
            
            (297,291
            )
            
            47,594,168Reclassification
                adjustment on adoptionof
                FASB 123(R)
            
            
            -
            
            
            (297,291
            )
            
            -
            
            
            297,291
            
            
            -Exercise
                of options and warrants
            
            
            372,000
            
            
            452,555
            
            
            -
            
            
            -
            
            
            452,555Stock-based
                compensation
            
            
            114,000
            
            
            689,753
            
            
            -
            
            
            -
            
            
            689,753Excess
                tax benefit
            
            
            -
            
            
            577,911
            
            
            -
            
            
            -
            
            
            577,911Net
                (loss)
            
            
            -
            
            
            -
            
            
            (1,761,038
            )
            
            -
            
            
            (1,761,038
            )BALANCE,
                DECEMBER 31, 2006
            
            
            8,025,295
            
            $
            22,715,180
            
            $
            24,838,169
            
            $
            -
            
            $
            47,553,349




See
            Notes
            to Consolidated Financial Statements.
 
 F-4


**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


YEARS
      ENDED DECEMBER 31, 2006, 2005 and 2004




**2006**
            
            **2005**
            
            **2004**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                (loss)/income
            
            $
            (1,761,038
            )
            $
            7,868,775
            
            $
            8,366,608Adjustments
                to reconcile income to net cash provided by/(used in) operating
                activities:Gain
                on sale of notes receivable
            
            
            (163,911
            )
            
            (1,310,887
            )
            
            (1,701,113
            )Gain
                on sale of other real estate owned
            
            
            (1,918,822
            )
            
            (1,758,351
            )
            
            (542,202
            )Gain
                on sale of originated loans
            
            
            (1,871,633
            )
            
            (1,276,566
            )
            
            (1,444,037
            )Depreciation
            
            
            1,164,005
            
            
            1,077,296
            
            
            494,890Amortization
                of deferred costs and fees on originated loans
            
            
            1,448,767
            
            
            157,317
            
            
            -Amortization
                of deferred financing costs
            
            
            4,568,744
            
            
            4,105,218
            
            
            2,761,476Amortization
                of debt discount
            
            
            1,265,050
            
            
            825,558
            
            
            767,820Settlement
                payment of success fee
            
            
            (4,500,000
            )
            
            -
            
            
            -Excess
                tax benefit
            
            
            (577,911
            )
            
            -
            
            
            -Non-cash
                compensation
            
            
            689,753
            
            
            762,159
            
            
            240,110Proceeds
                from the sale of and principal collections on loans held for
                sale
            
            
            39,538,033
            
            
            58,096,013
            
            
            102,331,140Origination
                of loans held for sale
            
            
            (30,785,901
            )
            
            (58,281,668
            )
            
            (108,432,590
            )Deferred
                tax provision
            
            
            2,868,013
            
            
            832,190
            
            
            1,279,282Purchase
                discount earned
            
            
            (8,924,838
            )
            
            (11,214,721
            )
            
            (9,234,896
            )Provision
                for loan losses
            
            
            9,750,393
            
            
            4,745,126
            
            
            3,705,333Changes
                in operating assets and liabilities:Accrued
                interest receivable
            
            
            (8,668,063
            )
            
            (4,835,712
            )
            
            (4,173,833
            )Other
                receivables
            
            
            695,119
            
            
            (1,943,005
            )
            
            (2,472,765
            )Income
                tax receivable
            
            
            (7,499,386
            )
            
            -
            
            
            -Other
                assets
            
            
            (334,135
            )
            
            2,164,174
            
            
            (2,591,484
            )Accounts
                payable and accrued expenses
            
            
            5,351,470
            
            
            3,760,491
            
            
            3,532,463Net
                cash provided by/(used in) operating activities
            
            
            333,709
            
            
            3,773,407
            
            
            (7,113,798
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Increase
                in restricted cash
            
            
            (11,128,402
            )
            
            (2,488,110
            )
            
            (3,650,322
            )Purchase
                of notes receivable
            
            
            (572,011,360
            )
            
            (468,324,936
            )
            
            (546,269,608
            )Principal
                collections on notes receivable
            
            
            281,742,236
            
            
            271,674,377
            
            
            209,206,383Principal
                collections on loans held for investment
            
            
            233,677,204
            
            
            102,176,991
            
            
            8,693,192Origination
                of loans held for investment
            
            
            (353,957,677
            )
            
            (367,253,790
            )
            
            (92,818,695
            )Net
                investment in short-term securities
            
            
            (3,357,174
            )
            
            (16,954,019
            )
            
            -Proceeds
                from sale of other real estate owned
            
            
            29,126,493
            
            
            32,343,836
            
            
            20,856,448Proceeds
                from sale of loans held for investment
            
            
            66,246,123
            
            
            8,375,669
            
            
            1,233,122Proceeds
                from sale of notes receivable
            
            
            3,807,050
            
            
            15,120,539
            
            
            20,241,957Purchase
                of building, furniture and fixtures
            
            
            (850,432
            )
            
            (2,899,445
            )
            
            (527,585
            )Net
                cash used in investing activities
            
            
            (326,705,939
            )
            
            (428,228,888
            )
            
            (383,035,108
            )


See
          Notes
          to Consolidated Financial Statements.
 
 F-5




**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS (CONTINUED)


YEARS
      ENDED DECEMBER 31, 2006, 2005 and 2004





**2006**
            
            **2005**
            
            **2004**CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from notes payable
            
            
            910,208,607
            
            
            836,608,815
            
            
            663,023,803Principal
                payments of notes payable
            
            
            (596,359,305
            )
            
            (437,443,092
            )
            
            (282,753,609
            )Proceeds
                from financing agreements
            
            
            432,517,720
            
            
            429,592,146
            
            
            206,219,638Principal
                payments of financing agreements
            
            
            (433,839,489
            )
            
            (411,848,265
            )
            
            (189,994,734
            )Repurchase
                obligation
            
            
            18,094,061
            
            
            -
            
            
            -Excess
                tax benefit
            
            
            577,911
            
            
            -
            
            
            -Payment
                of deferred financing costs
            
            
            (5,183,233
            )
            
            (6,512,750
            )
            
            (5,309,462
            )Exercise
                of options
            
            
            452,555
            
            
            224,785
            
            
            18,500Proceeds
                from issuance of common stock
            
            
            -
            
            
            12,592,616
            
            
            110,400Net
                cash provided by financing activities
            
            
            326,468,827
            
            
            423,214,255
            
            
            391,314,536NET
                CHANGE IN CASH AND CASH EQUIVALENTS
            
            
            96,598
            
            
            (1,241,226
            )
            
            1,165,630CASH
                AND CASH EQUIVALENTS, BEGINNING OF YEAR
            
            
            3,886,506
            
            
            5,127,732
            
            
            3,962,102CASH
                AND CASH EQUIVALENTS, END OF YEAR
            
            $
            3,983,104
            
            $
            3,886,506
            
            $
            5,127,732SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONCash
                payments for interest
            
            $
            109,246,114
            
            $
            64,743,849
            
            $
            30,296,647Cash
                payments for taxes
            
            $
            3,303,594
            
            $
            3,628,439
            
            $
            7,849,900NON-CASH
                INVESTING AND FINANCING ACTIVITY:Transfer
                of loans from held for sale to loans held for investment
            
            $
            483,604
            
            $
            5,278,073
            
            $
            18,067,224Transfer
                to OREO
            
            $
            30,249,122
            
            $
            48,239,717
            
            $
            35,624,810Capital
                lease
            
            $
            -
            
            $
            916,890
            
            $
            -




See
      Notes to Consolidated Financial
      Statements.




F-6


**FRANKLIN
      CREDIT MANAGEMENT CORPORATION AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


YEARS
      ENDED DECEMBER 31, 2006, 2005 and 2004




**1.** **ORGANIZATION
        AND BUSINESS**




As
      used
      herein references to the “Company,” “FCMC,” “we,” “our” and “us” refer to
      Franklin Credit Management Corporation, collectively with its
      subsidiaries.




We
      are a
      specialty consumer finance company primarily engaged in two related lines of
      business: (1) the acquisition, servicing and resolution of performing,
      reperforming and nonperforming residential mortgage loans and real estate
      assets; and (2) the origination of subprime mortgage loans, both for our
      portfolio and for sale into the secondary market. We specialize in acquiring
      and
      originating loans secured by 1-4 family residential real estate that generally
      fall outside the underwriting standards of Fannie Mae and Freddie Mac and
      involve elevated credit risk as a result of the nature or absence of income
      documentation, limited credit histories, higher levels of consumer debt or
      past
      credit difficulties. We typically purchase loan portfolios at a discount, and
      originate loans with interest rates and fees, calculated to provide us with
      a
      rate of return adjusted to reflect the elevated credit risk inherent in the
      types of loans we acquire and originate. Unlike many of our competitors, we
      generally hold for investment the loans we acquire and a significant portion
      of
      the loans we originate.




From
      inception through December 31, 2006, we had purchased and originated in excess
      of $3.91 billion in mortgage loans. As of December 31, 2006, we had total assets
      of $1.67 billion and our portfolios of notes receivable and loans held for
      investment, net, totaled $1.53 billion.




In
      August
      2005, we completed a public offering of 1,265,000 of shares of our common stock
      at a public offering price of $11.50 per share (including an exercise in full
      of
      the underwriter’s over allotment option to purchase 165,000 shares). The
      offering resulted in net proceeds to us and the addition to equity of
      approximately $12.6 million. In conjunction with the public offering, the
      Company’s common stock ceased to be quoted on the Over-the-Counter Bulletin
      Board under the symbol “FCSC” and commenced trading on The Nasdaq National
      Market under the symbol “FCMC.”




**2.** **SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES**




***Basis
      of Presentation*** -
      The
      consolidated financial statements include the accounts of the Company and its
      wholly owned subsidiaries. All significant intercompany accounts and
      transactions have been eliminated in consolidation.




Certain
      amounts in prior years have been reclassified to conform to the current year’s
      presentation.




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimates.
      The most significant estimates of the Company are the allowance for loan losses,
      the allocation of discount between accretable and nonaccretable, and income
      taxes. The Company’s estimates and assumptions primarily arise from risks and
      uncertainties associated with interest rate volatility and credit exposure.
      Although management is not currently aware of any factors that would
      significantly change its estimates and assumptions in the near term, future
      changes in market trends and conditions may occur which could cause actual
      results to differ materially.




F-7


***Operating
      Segments*** -
      SFAS
      No. 131, *Disclosures
      about Segments of an Enterprise and Related Information* ,
      requires companies to report financial and descriptive information about their
      reportable operating segments, including segment profit or loss, certain
      specific revenue and expense items, and segment assets. The Company has two
      reportable operating segments: (i) portfolio asset acquisition and resolution;
      and (ii) mortgage banking. The portfolio asset acquisition and resolution
      segment acquires performing, reperforming or nonperforming notes receivable
      and
      promissory notes from financial institutions and mortgage and finance companies,
      and services and collects such notes receivable through enforcement of terms
      of
      the original note, modification of original note terms and, if necessary,
      liquidation of the underlying collateral. The mortgage-banking segment
      originates or purchases, subprime residential mortgage loans from individuals
      whose credit histories, income and other factors cause them to be classified
      as
      subprime borrowers. (See Note 9).




***Earnings
      Per Share*** -
      Basic ****** earnings
      per share is calculated by dividing net income by the weighted average number
      of
      common shares outstanding during the year. Diluted earnings per share is
      calculated by dividing net income by the weighted average number of common
      shares outstanding, including the dilutive effect, if any, of stock options
      outstanding, warrants and restricted stock calculated under the treasury stock
      method. The effects of warrants, restricted stock units and stock options are
      excluded from the computation of diluted earnings per common share in periods
      in
      which the effect would be antidilutive. Dilutive potential common shares are
      calculated using the treasury stock method. For the year ended December 31,
      2006, 355,000 options were not included in the computation of earnings per
      share
      because they were antidilutive.




***Cash
      and Cash Equivalents*** **** -
      Cash
      and cash equivalents includes cash certificates of deposit with original
      maturities of three months or less, with the exception of restricted cash,
      which
      is reported separately on the Company’s balance sheets. The Company maintains
      accounts at banks, which at times may exceed federally insured limits. The
      Company has not experienced any losses from such concentrations.




***Restricted
      Cash*** -
      Restricted cash includes interest and principal collections received on the
      Company’s portfolio of notes receivable and loans held for investment,
      substantially all of which is required to pay down current debt obligations
      with
      its lending banks.




***Short-term
      Investments*** - The
      Company’s short-term investments include U.S. treasury bills, investment-grade
      commercial paper and money market accounts. The Company’s short-term investment
      policy is structured to provide an adequate level of liquidity in order to
      meet
      normal working capital needs and expansion of the loan portfolio. All short-term
      investments are classified as trading securities and recorded at fair
      value.




***Notes
      Receivable and Income Recognition*** **** -
      The
      notes receivable portfolio consists primarily of secured real estate mortgage
      loans purchased from financial institutions and mortgage and finance companies.
      Such notes receivable are performing, non-performing or sub-performing at the
      time of purchase and are generally purchased at a discount from the principal
      balance remaining. Notes receivable are stated at the amount of unpaid
      principal, reduced by purchase discount and allowance for loan losses. Notes
      purchased are stated net of purchase discount. Impaired notes receivable are
      measured based on the present value of expected future cash flows discounted
      at
      the note’s effective interest rate or, as a practical expedient, at the
      observable market price of the note receivable or the fair value of the
      collateral if the note is collateral dependent. The Company periodically
      evaluates the collectibility of both interest and principal of its notes
      receivable to determine whether they are impaired. A note receivable is
      considered impaired when it is probable the Company will be unable to collect
      all contractual principal and interest payments due in accordance with the
      terms
      of the note agreement.




F-8


In
      general, interest on the notes receivable is calculated based on contractual
      interest rates applied to daily balances of the principal amount outstanding
      using the accrual method. Accrual of interest on notes receivable, including
      impaired notes receivable, is discontinued when management believes, after
      considering economic and business conditions and collection efforts, that the
      borrower’s financial condition is such that collection of interest is doubtful.
      When interest accrual is discontinued, all unpaid accrued interest is reversed
      against interest income. Subsequent recognition of income occurs only to the
      extent payment is received, subject to management’s assessment of the
      collectibility of the remaining interest and principal. A non-accrual note
      is
      restored to an accrual status when it is no longer delinquent and collectibility
      of interest and principal is no longer in doubt and past due interest is
      recognized at that time.




***Discounts
      on Acquired Loans*** -
      Effective January 1, 2005, as a result of the required adoption of SOP 03-3
      the
      Company was required to change its accounting for loans acquired subsequent
      to
      December 31, 2004, which have evidence of deterioration of credit quality since
      origination and for which it is probable, at the time of our acquisition, that
      the Company will be unable to collect all contractually required payments.
      For
      these loans, the excess of the undiscounted contractual cash flows over the
      undiscounted cash flows estimated by us at the time of acquisition is not
      accreted into income (nonaccretable discount). The amount representing the
      excess of cash flows estimated by us at acquisition over the purchase price
      is
      accreted into purchase discount earned over the life of the loan (accretable
      discount). The nonaccretable discount is not accreted into income. If cash
      flows
      cannot be reasonably estimated for any loan, and collection is not probable,
      the
      cost recovery method of accounting may be used. Under the cost recovery method,
      any amounts received are applied against the recorded amount of the
      loan.




Subsequent
      to acquisition, if cash flow projections improve, and it is determined that
      the
      amount and timing of the cash flows related to the nonaccretable discount are
      reasonably estimable and collection is probable, the corresponding decrease
      in
      the nonaccretable discount is transferred to the accretable discount and is
      accreted into interest income over the remaining life of the loan on the
      interest method. If cash flow projections deteriorate subsequent to acquisition,
      the decline is accounted for through the allowance for loan losses.




There
      is
      judgment involved in estimating the amount of the loan’s future cash flows. The
      amount and timing of actual cash flows could differ materially from management’s
      estimates, which could materially affect our financial condition and results
      of
      operations. Depending on the timing of an acquisition, the initial allocation
      of
      discount generally will be made primarily to nonaccretable discount until the
      Company has boarded all loans onto its servicing system; at that time, any
      cash
      flows expected to be collected over the purchase price will be transferred
      to
      accretable discount. Generally, the allocation will be finalized no later than
      ninety days from the date of purchase.




For
      loans
      not addressed by SOP 03-3 that are acquired subsequent to December 31, 2004,
      the
      discount, which represents the excess of the amount of reasonably estimable
      and
      probable discounted future cash collections over the purchase price, is accreted
      into purchase discount earned using the interest method over the term of the
      loans. This is consistent with the method the Company utilizes for its
      accounting for loans purchased prior to January 1, 2005, except that for these
      loans an allowance allocation was also made at the time of
      acquisition.




F-9


***Allowance
      for Loan Losses*** **** -
      The
      Company performs reviews of its loan portfolio upon purchase, at loan boarding,
      and on a frequent basis thereafter to segment impaired loans under SFAS No.
      114, *Accounting
      by Creditors for Impairment of a Loan - an amendment of FASB Statements No.
      5
      and 15* .
      A loan
      is considered impaired when it is probable that we will be unable to collect
      all
      contractual principal and interest payments due in accordance with the terms
      of
      the note agreement. An allowance for loan losses is estimated based on our
      impairment analysis.  Management’s
      judgment in determining the adequacy of the allowance for loan losses is based
      on the evaluation of individual loans within the portfolios, the known and
      inherent risk characteristics and size of the portfolio, the assessment of
      current economic and real estate market conditions, estimates of the current
      value of underlying collateral, past loan loss experience and other relevant
      factors. In connection with the determination of the allowance for loan losses,
      management obtains independent appraisals for the underlying collateral when
      considered necessary. Management believes that the allowance for loan losses
      is
      adequate. The allowance for loan losses is a material estimate, which could
      change significantly in the near term. An allowance of $52,424,375 and
      $67,276,155 is included in notes receivable at December 31, 2006 and 2005,
      respectively. See Note 3 for accretable and nonaccretable
      discounts.




Effective
      January 1, 2005, and as a result of the adoption of SOP 03-3, additions to
      the
      allowance for loan losses relating to newly acquired loans reflect only those
      losses incurred by us subsequent to acquisition. The Company no longer increases
      the allowances through allocations from purchase discount for loans that meet
      the requirements of SOP 03-3. Additionally, general risk allocations are no
      longer applied to loans purchased subsequent to December 31, 2004. Consequently,
      the allowance for loan losses has declined since the adoption of SOP 03-3,
      and
      it is anticipated that the allowance will continue to decline as credits for
      loan losses may continue to be recorded if loans pay off and allowances related
      to these loans are not required or additions due to loan impairment are not
      required.




***Originated
      Loans Held for Sale*** -
      The
      loans held for sale consist primarily of secured real estate first and second
      mortgages originated by the Company. Such loans held for sale are performing
      and
      are carried at lower of cost or market. The gain/loss on sale is recorded as
      the
      difference between the carrying amount of the loan and the proceeds from sale
      on
      a loan-by-loan basis. **** The **** Company
      records a sale upon settlement and when the title transfers to the
      seller.




Transfers
      of financial assets are accounted for as sales, when control over the assets
      has
      been surrendered. Control over transferred assets is deemed to be surrendered
      when (1) the assets have been isolated from the Company, (2) the transferee
      has
      the right (free of conditions that constrain it from taking advantage of that
      right) to pledge or exchange the transferred assets, and (3) the Company does
      not maintain effective control over the transferred assets through either (a)
      an
      agreement that entitles and obligates the Company to repurchase or redeem them
      before their maturity or (b) the ability to unilaterally cause the holder to
      return specific assets.




Gains
      or
      losses resulting from loan sales are recognized at the time of sale, based
      on
      the difference between the net sales proceeds and the carrying value of the
      loans sold.




Certain
      whole-loan sale contracts include provisions requiring the Company to repurchase
      a loan if a borrower fails to make one or more of the first loan payments due
      on
      the loan. In addition, an investor may request that the Company refund a portion
      of the premium paid on the sale of mortgage loans if a loan is prepaid in full
      within a certain amount of time from the date of sale. The Company records
      a
      provision for estimated repurchases and premium recapture on loans sold, which
      is charged to gain on sale of loans.




F-10


***Originated
      Loans Held for Investment*** -
      During
      the third quarter of 2006, the Company modified its estimate of the
      collectibility of accrued interest on certain fully secured loans that are
      in
      the foreclosure process. As a result, the Company continues to accrue interest
      on secured real estate first mortgage loans originated by the Company up to
      a
      maximum of 209 days contractually delinquent with a recency payment in the
      last
      179 days, and that are judged to be fully recoverable for both principal and
      accrued interest based on a foreclosure analysis, which includes an updated
      estimate of the realizable value of the property securing the loan.




In
      general, interest on originated loans held for investment is calculated based
      on
      contractual interest rates applied to daily balances of the principal amount
      outstanding using the accrual method. The Company’s decision to revise its
      estimate of collectibility was based on recent collection information, which
      shows that the Company is collecting 100% of principal and between 90% to 100%
      of delinquent interest when these loans in the foreclosure process are paid
      off
      or settled.




The
      accrual of interest is discontinued when management believes, after considering
      economic and business conditions and collection efforts, that the borrower’s
      financial condition is such that collection of interest is doubtful, which
      can
      be less than 209 days contractually delinquent with a recency payment in the
      last 179 days. When interest accrual is discontinued, all unpaid accrued
      interest is reversed against interest income. Subsequent recognition of income
      occurs only to the extent payment is received, subject to management’s
      assessment of the collectibility of the remaining interest and principal. A
      non-accrual loan is restored to an accrual status when the collectibility of
      interest and principal is no longer in doubt and past due interest is recognized
      at that time.




***Other
      Real Estate Owned*** - Other
      real estate owned (“OREO”) consists of properties acquired through, or in lieu
      of, foreclosure or other proceedings and are held for sale and carried at the
      lower of cost or fair value less estimated costs to sell. Any write-down to
      fair
      value, less cost to sell, is charged to earnings based upon management’s
      continuing assessment of the fair value of the underlying collateral. OREO
      is
      evaluated periodically to ensure that the recorded amount is supported by
      current fair values and valuation allowances are recorded as necessary to reduce
      the carrying amount to fair value less estimated cost to sell. Revenue and
      expenses from the operation of OREO and changes in the valuation allowance
      are
      included in operations. Direct costs relating to the development and improvement
      of the property are capitalized, subject to the limit of fair value of the
      property, while costs related to holding the property are expensed. Gains or
      losses are included in operations upon disposal of the property.




***Derivatives*** - As
      part of our interest rate management process, we entered into interest rate
      cap
      agreements in 2006. It is not our policy to use derivatives to speculate on
      interest rates. In accordance with SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      as
      amended and interpreted, derivative financial instruments are reported on the
      consolidated balance sheets at their fair value.




The
      interest rate caps are not designated as hedging instruments for accounting
      purpose, unrealized changes in fair value are recognized in the period in which
      the changes occur and realized gains and losses are recognized in the period
      when such instruments are settled.




The
      Company follows the accounting required by Statement 133 Implementation Issue
      No. B36 (“B36”) for the bifurcation of an embedded derivative related to success
      fees currently and potentially payable to our principal lender following the
      repayment of notes payable. B36 requires the success fee to be bifurcated from
      the notes payable and recorded as an embedded derivative at fair value each
      reporting period. Fair value has been determined by discounting the estimated
      future success fee payments at an appropriate discount rate. See Note 5 for
      a
      description of success fees. The Company does not hold any other derivative
      financial instruments.




F-11


As
      notes
      payable are issued, the fair value of the embedded derivative related to success
      fees is recorded as a liability with an offset to debt discount. The debt
      discount is amortized to interest expense over the estimated repayment of the
      related notes payable. As discussed in Note 5, on December 1, 2006, the Company
      and its lender reached an agreement to eliminate the success fee.




***Building,
      Furniture and Equipment*** -
      Building, furniture and equipment, including leasehold improvements, is recorded
      at cost net of accumulated depreciation and amortization. Depreciation is
      computed using the straight-line method over the estimated useful lives of
      the
      assets, which range from 3 to 40 years. Amortization of leasehold improvements
      is computed using the straight-line method over the lives of the related leases
      or useful lives of the related assets, whichever is shorter. Maintenance and
      repairs are expensed as incurred.




***Deferred
      Financing Costs*** -
      Deferred financing costs, which include origination fees incurred in connection
      with obtaining term loan financing from our banks, are deferred and are
      amortized over the term of the related loan. See Note 5 for a description of
      origination fees.




***Retirement
      Plan*** - The
      Company maintains a savings plan, which is intended to qualify under Section
      401(k) of the Internal Revenue Code. All employees are eligible to be a
      participant in the plan. The plan provides for voluntary contributions by
      participating employees in amounts up to 20% of their annual compensation,
      subject to certain limitations. Currently, the Company matches 50% of the first
      3% of the employee’s contribution. The Company contributed $111,192, $109,882
      and $65,147 in 2006, 2005 and 2004, respectively.




***Income
      Taxes*** - Income
      taxes are accounted for under SFAS No. 109, *Accounting
      for Income Taxes* ,
      which
      requires an asset and liability approach in accounting for income taxes. This
      method provides for deferred income tax assets or liabilities based on the
      temporary difference between the income tax basis of assets and liabilities
      and
      their carrying amount in the consolidated financial statements. Deferred tax
      assets and liabilities are measured using enacted tax rates expected to apply
      to
      taxable income in the years in which those temporary differences are expected
      to
      be recovered or settled. Deferred tax assets are reduced by a valuation
      allowance when management determines that it is more likely than not that some
      portion or all of the deferred tax assets will not be realized. Deferred tax
      assets and liabilities are adjusted for the effects of changes in tax laws
      and
      rates on the date of the enactment of the changes.




***Prepayment
      Penalties and Other Income*** -
      Prepayment penalties and other income consists of prepayment penalties, late
      charges, and other miscellaneous income. Such income is recognized on a cash
      basis.




***Fair
      Value of Financial Instruments*** - SFAS
      No. 107, *Disclosures
      about Fair Value of Financial Instruments* ,
      requires disclosure of fair value information of financial instruments, whether
      or not recognized in the balance sheets, for which it is practicable to estimate
      that value. In cases where quoted market prices are not available, fair values
      are based on estimates using present value or other valuation techniques. Those
      techniques are significantly affected by the assumptions used, including the
      discount rate and estimates of future cash flows. In that regard, the derived
      fair value estimates cannot be substantiated by comparison to independent
      markets and, in many cases, could not be realized in immediate settlement of
      the
      instruments. SFAS No. 107 excludes certain financial instruments and all
      non-financial assets and liabilities from its disclosure requirements.
      Accordingly, the aggregate fair value amounts do not represent the underlying
      value of the Company.




F-12


The
      following methods and assumptions were used by the Company in estimating the
      fair value of its financial instruments:




***a.***
            ***Cash,
                Restricted Cash, Accrued Interest Receivables, Other Receivable and
                Accrued Interest Payable***-
                The carrying values reported in the consolidated balance sheets are
                a
                reasonable estimate of fair value.




***b.***
            ***Short-term
                Investments***-
                These investments mature monthly; therefore, the carrying values
                reported
                in the consolidated balance sheets are a reasonable estimate of fair
                value.




***c.***
            ***Notes
                Receivable***-
                Fair value of the net note receivable portfolio is estimated by
                discounting the estimated future cash flows using the interest method.
                The
                fair value of notes receivable at December 31, 2006 and 2005 was
                equivalent to their carrying value of $1,109,191,446 and $849,571,318,
                respectively.




***d.***
            ***Loans
                Held for Investment, Loans Held for Sale***-
                The carrying values reported in the consolidated balance sheets are
                a
                reasonable estimate of fair value. The fair value of loans held for
                investment at December 31, 2006 and 2005 was equivalent to their
                carrying
                value of $422,682,795 and $372,315,935, respectively. The fair value
                of
                loans held for sale at December 31, 2006 and 2005 was equivalent
                to their
                carrying value of $4,114,284 and $12,844,882,
                respectively.




***e.***
            ***Short-term
                Borrowings***-
                The interest rates on financing agreements and other short-term borrowings
                reset on a monthly basis; therefore, the carrying amounts of these
                liabilities approximate their fair value. The fair value at December
                31,
                2006 and 2005 was $55,962,315 and $57,284,085,
                respectively.




***f.***
            ***Long-term
                Debt***-
                The interest rate on the Company’s long-term debt (notes payable) is a
                variable rate that resets monthly; therefore, the carrying value
                reported
                in the balance sheet approximates fair value at $1,520,217,264 and
                $1,203,880,994 at December 31, 2006 and 2005,
                respectively.




***Comprehensive
      Income*** - SFAS
      No. 130, *Reporting
      Comprehensive Income* ,
      defines
      comprehensive income as the change in equity of a business enterprise during
      a
      period from transactions and other events and circumstances, excluding those
      resulting from investments by and distributions to stockholders. The Company
      had
      no items of other comprehensive income; therefore, net income was the same
      as
      its comprehensive income for all periods presented.




***Stock-Based
      Compensation Plans*** - The
      Company maintains share-based payment arrangements under which employees are
      awarded grants of restricted stock, non-qualified stock options, incentive
      stock
      options and other forms of stock-based payment arrangements. Prior to January
      1,
      2006, the Company accounted for these awards under the recognition and
      measurement provisions of Accounting Principles Board Opinion No. 25,
“ *Accounting
      for Stock Issued to Employees* ”
(“APB
      25”) as permitted under SFAS No. 123, “ *Accounting
      for Stock-Based Compensation* ”
(“SFAS
      123”). Accordingly, compensation cost for stock options was not recognized as
      long as the stock options granted had an exercise price equal to the market
      price of the Company’s common stock on the date of grant. Effective January 1,
      2006, the Company adopted the fair value recognition provisions of SFAS No.
      123
      (revised 2004), “ *Share-Based
      Payment* ,”
(“SFAS
      123(R)”) using the modified-prospective transition method. Under this transition
      method, compensation cost recognized beginning January 1, 2006 includes
      compensation cost for all share-based payment arrangements issued, but not
      yet
      vested as of December 31, 2005, based on the grant date fair value and expense
      attribution methodology determined in accordance with the original provisions
      of
      SFAS 123. Compensation cost for all share-based payment arrangements granted
      subsequent to December 31, 2005, is based on the grant-date fair value estimated
      in accordance with the provisions of SFAS 123(R). In addition, the effect of
      forfeitures on restricted stock (if any), is estimated when recognizing
      compensation cost. Results for prior periods have not been recast for the
      adoption of SFAS No. 123(R). The adoption of SFAS No. 123(R) during 2006
      resulted in an incremental stock-based compensation expense of approximately
      $285,000.




F-13


Prior
      to
      adoption of SFAS 123(R), the Company presented all tax benefits of deductions
      resulting from the exercise of stock options as operating cash flows in the
      Statement of Cash Flows. SFAS 123(R) requires the cash flows resulting from
      the
      tax benefits of tax deductions in excess of the compensation cost recognized
      for
      those options (excess tax benefits) to be classified as financing cash
      flows.




The
      compensation cost recognized in income was $689,753 and $762,159 for the years
      ended December 31, 2006 and 2005, respectively.




Prior
      to
      January 1, 2006, our Stock Incentive Plan was accounted for under the
      recognition and measurement principles of APB Opinion 25 and related
      interpretations. The following table illustrates the effect on net income and
      earnings per share if the fair value based method had been applied to all
      awards:


**2005**
              
              **2004**Net
                  income - as reported
              
              $
              7,868,775
              
              $
              8,366,608Stock-based
                  compensation expense, actual(1)
              
              
              411,566
              
              
              99,680Stock-based
                  compensation expense determined under fair value method, net of
                  related
                  tax effects(2)
              
              
              (868,411
              )
              
              (153,042
              )Net
                  income - pro forma
              
              $
              7,411,930
              
              $
              8,313,246Earnings
                  per share:Basic
                  - as reported
              
              $
              1.19
              
              $
              1.41Basic
                  - pro forma
              
              $
              1.12
              
              $
              1.40Diluted
                  - as reported
              
              $
              1.09
              
              $
              1.25Diluted
                  - pro forma
              
              $
              1.03
              
              $
              1.25





(1)
            The
                stock-based compensation cost, net of related tax effects, included
                in the
                determination of net income - as
                reported.




(2)
            The
                stock-based compensation cost, net of related tax effects, that would
                have
                been included in the determination of
                net income if the fair value based method had been applied to all
                awards.





***Recent
      Accounting Pronouncements***




In
      February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 159, “ *The
      Fair Value Option for Financial Assets and Financial Liabilities, including
      an
      amendment of FASB Statement No. 115.* ”
SFAS
      No. 159 permits entities to choose to measure many financial instruments
      and certain other items at fair value. Unrealized gains and losses on items
      for
      which the fair value option has been elected will be recognized in earnings
      at
      each subsequent reporting date. This accounting standard is effective for
      financial statements issued for fiscal years beginning after November 15,
      2007. The Company is still evaluating the impact the adoption of this statement
      may have on its consolidated financial statements.




F-14


In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, “ *Fair
      Value Measurements* ”
(SFAS
      157). SFAS 157 enhances existing guidance for measuring assets and liabilities
      using fair value. Prior to the issuance of SFAS 157, guidance for applying
      fair
      value was incorporated in several accounting pronouncements. SFAS 157 provides
      a
      single definition of fair value, together with a framework for measuring it,
      and
      requires additional disclosure about the use of fair value to measure assets
      and
      liabilities. SFAS 157 also emphasizes that fair value is a market-based
      measurement, not an entity-specific measurement, and sets out a fair value
      hierarchy with the highest priority being quoted prices in active markets.
      Under
      SFAS 157, fair value measurements are disclosed by level within that hierarchy.
      While SFAS 157 does not add any new fair value measurements, it does change
      current practice. Changes to practice include: (1) a requirement for an entity
      to include its own credit standing in the measurement of its liabilities; (2)
      a
      modification of the transaction price presumption; (3) a prohibition on the
      use
      of block discounts when valuing large blocks of securities for broker-dealers
      and investment companies; and (4) a requirement to adjust the value of
      restricted stock for the effect of the restriction even if the restriction
      lapses within one year. SFAS 157 is effective for financial statements issued
      for fiscal years beginning after November 15, 2007, and interim periods within
      those fiscal years. Management is currently evaluating the effect of the
      statement, if any, on the Company’s results of operations and financial
      condition.




On
      July 13, 2006, the FASB released FASB Interpretation No. 48,
“ *Accounting
      for Uncertainty in Income Taxes* ,”
an
      interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
      accounting and reporting for income taxes where interpretation of the tax law
      may be uncertain. FIN 48 prescribes a comprehensive model for the financial
      statement recognition, measurement, presentation and disclosure of income tax
      uncertainties with respect to positions taken or expected to be taken in income
      tax returns. The Company will adopt FIN 48 on January 1, 2007. The
      cumulative effect, if any, of applying FIN 48 will be recorded as an adjustment
      to the beginning balance of “Retained earnings.” Management is currently
      evaluating the effect of FIN 48 on the Company.




**3.** **NOTES
        RECEIVABLE, LOANS HELD FOR INVESTMENT AND LOANS HELD FOR SALE, PURCHASE DISCOUNT
        AND ALLOWANCE FOR LOAN LOSSES**




Notes
      receivable consist principally of residential one-to-four family mortgage loans
      as of December 31, 2006 and 2005 secured as follows:


**2006**
              
              **2005**Real
                  estate secured
              
              $
              1,134,576,390
              
              $
              901,260,281Manufactured
                  and mobile homes
              
              
              21,093,954
              
              
              18,748,377Unsecured
              
              
              18,369,223
              
              
              14,648,7551,174,039,567
              
              
              934,657,413Less:Purchase
                  discount
              
              
              (12,423,746
              )
              
              (17,809,940
              )Allowance
                  for loan losses
              
              
              (52,424,375
              )
              
              (67,276,155
              )Balance
              
              $
              1,109,191,446
              
              $
              849,571,318





F-15


Originated
      loans held for sale of $4,114,284 and $12,844,882 as of December 31, 2006 and
      2005, respectively, represent residential one-to-four family (real estate
      secured) mortgage loans originated by the Company.




Originated
      loans held for investment represent residential one-to-four family real estate
      mortgage loans as of December 31, 2006 and 2005 secured as follows:


**2006**
              
              **2005**Real
                  estate secured
              
              $
              408,682,923
              
              $
              374,308,419Consumer
                  unsecured
              
              
              122,396
              
              
              75,408Manufactured
                  homes
              
              
              83,727
              
              
              84,219408,889,046
              *
              
              374,468,046Less:Net
                  deferred costs and fees
              
              
              (2,343,425
              )
              
              (1,077,058
              )Allowance
                  for loan losses
              
              
              (866,466
              )
              
              (1,075,053
              )Balance
              
              $
              405,679,155
              *
              $
              372,315,935





*
            Excludes
                $17.0 million of loans, net of fees, sold to investors, which the
                Company
                committed to repurchase, that are included on the face of the balance
                sheet at December 31, 2006.





The
      Company originated $355 million and $371 million in loans held for investment
      during the years ended December 31, 2006 and 2005, respectively.




As
      of
      December 31, 2006, contractual maturities of notes receivable, originated loans
      held for sale and originated loans held for investment, net of the allowance
      for
      loan losses and nonaccretable discount, were as follows:


**Year
                  Ending December 31,**
              
              **Notes
                  Receivable**
              
              **Loans
                  Held**
                **for
                  Sale**
              
              **Loans
                  Held**
                **for
                  Investment**2007
              
              $
              139,036,963
              
              $
              25,963
              
              $
              1,918,1212008
              
              
              107,602,377
              
              
              28,102
              
              
              2,043,9402009
              
              
              85,691,083
              
              
              30,421
              
              
              2,184,8492010
              
              
              70,649,483
              
              
              32,935
              
              
              2,342,6912011
              
              
              66,537,537
              
              
              35,660
              
              
              2,516,572Thereafter
              
              
              664,940,505
              
              
              3,961,203
              
              
              394,672,982$
              1,134,457,948
              
              $
              4,114,284
              
              $
              405,679,155*







*
            Excludes
                $17.0 million of loans, net of fees, sold to investors, which the
                Company
                committed to repurchase, that are included on the face of the balance
                sheet at December 31, 2006.





It
      is the
      Company’s experience that a portion of the notes receivable and loans held for
      investment portfolio may be refinanced or repaid before contractual maturity
      dates. The above tabulation, therefore, is not to be regarded as a forecast
      of
      future cash collections. During the years ended December 31, 2006, 2005 and
      2004, cash collections of principal amounts totaled approximately $515 million,
      $375 million and $230 million, respectively, and the ratios of these cash
      collections to average principal balances were approximately 34%, 30% and 32%,
      respectively.




F-16


Changes
      in the allowance for loan losses on notes receivable for the years ended
      December 31, 2006, 2005 and 2004 are as follows:


**2006**
              
              **2005**
              
              **2004**Balance,
                  beginning
              
              $
              67,276,155
              
              $
              89,628,299
              
              $
              46,247,230Allowance
                  allocated on purchased portfolios
              
              
              -
              
              
              -
              
              
              53,836,759Net
                  change in allowance
              
              
              (24,397,664
              )
              
              (26,029,871
              )
              
              (14,161,023
              )Provision
                  for loan losses
              
              
              9,545,884
              
              
              3,677,727
              
              
              3,705,333Balance,
                  ending
              
              $
              52,424,375
              
              $
              67,276,155
              
              $
              89,628,299


The
      net
      change in allowance presented above represents charge-offs, recoveries, payoffs,
      transfers to OREO and subsequent increases in the allowance for notes
      receivable.




Changes
      in the allowance for loan losses on loans held for sale and loans held for
      investment for the years ended December 31, 2006, 2005 and 2004 are as
      follows:




**2006**
            
            **2005**
            
            **2004**Balance,
                beginning
            
            $
            1,078,162
            
            $
            330,874
            
            $
            178,283Net
                change in allowance
            
            
            (416,204
            )
            
            (257,100
            )
            
            (182,939
            )Provision
                for loan losses
            
            
            204,508
            
            
            1,004,388
            
            
            335,530Balance,
                ending
            
            $
            866,466
            
            $
            1,078,162
            
            $
            330,874





At
      December 31, 2006, 2005 and 2004, principal amounts of notes receivable included
      approximately $251 million, $245 million and $307 million, respectively, of
      notes for which there was no accrual of interest income. The following
      information relates to impaired notes receivable, which include all such notes
      receivable as of and for the years ended December 31, 2006, 2005 and
      2004:




**2006**
            
            **2005**
            
            **2004**Total
                impaired notes receivable
            
            $
            251,210,748
            
            $
            244,986,933
            
            $
            306,840,734Allowance
                for loan losses related to impairednotes
                receivable
            
            $
            44,679,113
            
            $
            43,691,572
            
            $
            68,858,866Interest
                income recognized
            
            $
            14,225,184
            
            $
            18,467,499
            
            $
            9,959,069Average
                balance of impaired notes receivableduring
                the year
            
            $
            248,098,840
            
            $
            275,913,834
            
            $
            216,591,228





F-17


At
      December 31, 2006, 2005 and 2004, the principal amount of loans held for
      investment included loans on non-accrual status of approximately $110 million,
      $56 million and $4 million, respectively.


**2006**
              
              **2005**
              
              **2004**Total
                  impaired loans held for investment
              
              $
              110,107,533
              
              $
              55,867,250
              
              $
              3,827,364Allowance
                  for loan losses related to loans held for investment
              
              $
              866,466
              
              $
              1,075,053
              
              $
              330,874Interest
                  income recognized
              
              $
              1,792,406
              
              $
              1,212,187
              
              $
              75,612Average
                  balance of impaired loans held for investment during the
                  year
              
              $
              93,455,505
              
              $
              29,847,307
              
              $
              2,839,622


In
      the
      normal course of business, the Company restructures or modifies terms of certain
      loans to enhance the collectibility of such loans.




As
      of
      December 31, 2006 and December 31, 2005, the unpaid principal balance of
      mortgage loans being serviced by the Company for others was $457,944 and
      $1,338,596, respectively. Mortgage loans serviced for others are not included
      on
      the Company’s consolidated balance sheets.




The
      following table sets forth certain information relating to the activity in
      the
      accretable and nonaccretable discounts for principal, which are shown as a
      component of notes receivable principal on the balance sheet, in accordance
      with
      SOP 03-3 for the period indicated:




**Year
                Ended December 31,****2006**
            
            **2005****Accretable
                Discount**Balance,
                beginning of period
            
            $
            11,360,617
            
            $
            -New
                acquisitions
            
            
            2,549,873
            
            
            11,342,596Accretion
            
            
            (3,938,378
            )
            
            (1,587,094
            )Transfers
                from nonaccretable
            
            
            2,883,125
            
            
            1,912,245Net
                reductions relating to loans sold or repurchased
            
            
            (127,184
            )
            
            (218,639
            )Other
                activity
            
            
            114,702
            
            
            (88,491
            )Balance,
                end of period
            
            $
            12,842,755
            
            $
            11,360,617**Nonaccretable
                Discount**Balance,
                beginning of period
            
            $
            23,981,013
            
            $
            -New
                acquisitions
            
            
            46,883,365
            
            
            26,671,609Transfers
                to accretable
            
            
            (2,883,125
            )
            
            (1,912,245
            )Net
                reductions relating to loans sold or repurchased
            
            
            (370,880
            )
            
            (118,180
            )Net
                reductions relating to loans charged off
            
            
            (3,319,554
            )
            
            (159,436
            )Loans
                transferred to OREO, other
            
            
            (3,759,316
            )
            
            (500,735
            )Balance,
                end of period
            
            $
            60,531,503
            
            $
            23,981,013





The
      Company purchased $621 million of loans subject to SOP 03-3 during 2006. The
      outstanding balance of notes receivable subject to SOP 03-3 at December 31,
      2006
      was $872 million. The allowance for loan losses related to loans subject to
      SOP
      03-3 was $0 at December 31, 2005 and $1.2 million at December 31, 2006. The
      allowance was increased during 2006 by a charge to provision for loan losses
      in
      the amount of $1.2 million.


F-18




**4.** **BUILDING,
        FURNITURE AND EQUIPMENT**




At
      December 31, 2006 and 2005, building, furniture and equipment consisted of
      the
      following:




**2006**
            
            **2005**Building
                and improvements
            
            $
            2,988,787
            
            $
            2,827,258Furniture
                and equipment
            
            
            4,695,623
            
            
            4,482,9247,684,410
            
            
            7,310,182Less
                accumulated depreciation
            
            
            (3,968,502
            )
            
            (3,280,701
            )$
            3,715,908
            
            $
            4,029,481





**5.** **NOTES
        PAYABLE**




Notes
      payable consists primarily of term loans (“Subsidiary Loans”) made to the
      Company by Sky Bank, an Ohio banking corporation (our “Lender”) and its
      participant banks to acquire portfolios of notes receivable (“Pledged
      Collateral”) and term loans made by our lender to Tribeca Lending Corporation
      (“Tribeca”) to principally finance originated loans held for
      investment.




***Master
      Credit Facilities***




On
      October 13, 2004, the Company, and its finance subsidiaries, excluding Tribeca,
      entered into a Master Credit and Security Agreement with Sky Bank. Under this
      master credit facility, we request loans to finance the purchase of residential
      mortgage loans or refinance existing outstanding loans. The facility does not
      include a commitment to additional lendings, which are therefore subject to
      our
      lender’s discretion as well as any regulatory limitations to which our lender is
      subject. The facility has been extended by our lender to April 30, 2007. As
      of
      December 31, 2006 and 2005, the amounts outstanding under this master credit
      facility were $1.15 billion and $884.4 million, respectively.




Interest
      on the loans is payable monthly at a floating rate equal to the highest Federal
      Home Loan Bank of Cincinnati 30-day advance rate as published daily by Bloomberg
      under the symbol FHL5LBRI, or the “30-day advance rate,” plus the applicable
      margin as follows:




**For
                Loans Funded****Prior
                to July 1, 2005**
            
            **On
                or After July 1, 2005**If
                the 30-day advance rate is
            
            the
                applicable margin is
            
            the
                applicable margin isLess
                than 2.26%
            
            350
                basis points
            
            300
                basis points2.26
                to 4.50%
            
            325
                basis points
            
            275
                basis pointsGreater
                than 4.50%
            
            300
                basis points
            
            250
                basis points





In
      addition, upon each closing of a loan after June 23, 2006 we are required to
      pay
      an origination fee equal to 0.50% of the amount of the loan unless otherwise
      agreed to by our lender. For loans funded between July 1, 2005 and June 23,
      2006, the origination fee paid was 0.75% of the amount of the loan, and for
      loans funded prior to July 1, 2005, the origination fee paid was 1% of the
      amount of the loan unless otherwise agreed to by our lender.




F-19


The
      unpaid principal balance of each loan is amortized over a period of twenty
      years, but matures three years after the date the loan was made. Historically,
      our lender has agreed to extend the maturities of such loans for additional
      three-year terms upon their maturity. We are required to make monthly payments
      of the principal and interest on our outstanding loans.




Our
      obligations under the master credit facility are secured by a first priority
      lien on notes receivable acquired by us that are financed by proceeds of loans
      made to us under the facility. In addition, pursuant to a lockbox arrangement,
      our lender is entitled to receive all sums payable to us in respect of any
      of
      the collateral. At December 31, 2006, we were in compliance with the covenants
      of the Master Credit and Security Agreement.




In
      February 2006, Tribeca and certain of its finance subsidiaries entered into
      the
      Tribeca Master Credit and Security Agreement (“Tribeca Master Credit Facility”)
      with Sky Bank, pursuant to which certain Tribeca subsidiaries may borrow term
      funds to finance their origination of loans Tribeca previously financed under
      its warehouse line of credit with Sky and consolidate and refinance prior term
      loans made by Sky Bank to such subsidiaries. The facility does not include
      a
      commitment for a specified number of lendings, which are therefore subject
      to
      Sky Bank’s discretion, as well as any regulatory limitations to which Sky Bank
      is subject. The facility expires on February 28, 2008.




As
      of
      December 31, 2006 and 2005, Tribeca, through its subsidiaries, had borrowed
      an
      aggregate of $370.9 million and $322.3 million, respectively, in term loans.
      Interest on the loans is payable monthly at a floating rate equal to the highest
      Federal Home Loan Bank of Cincinnati 30-day advance rate published by Bloomberg
      under the symbol FHL5LBRI, plus the applicable margin. The interest rate on
      Tribeca’s term loans is based on the same rate and margin matrix provided above
      as loans made under the Master Credit and Security Agreement. In addition,
      upon
      the closing of each term loan, the applicable subsidiary-borrower pays an
      origination fee of approximately 0.50% of the amount of the note. The
      origination fee was 1% of the amount of the loan for loans funded prior to
      July
      1, 2005. The unpaid balance of each term loan is amortized over a period of
      20
      years, but matures three years after the loan was made. Each term loan is
      subject to mandatory payment **** under
      certain circumstances. Each subsidiary-borrower is required to make monthly
      payments of the principal and interest of its outstanding note. Each term loan
      is secured by a lien on certain promissory notes and hypothecation agreements,
      as well as all monies, securities and other property held by, received by or
      in
      transit to our lender. The Tribeca Master Credit Facility contains affirmative
      and negative covenants and events of default customary for financings of this
      type. At December 31, 2006, Tribeca was in compliance with the covenants of
      the
      Tribeca Master Credit and Security Agreement.




***Elimination
      of Success Fees***




In
      June
      2006, the Company received from Sky Bank a letter (the “June Modification
      Letter”) modifying the Master Credit and Security Agreement, dated as of October
      13, 2004 (the “Franklin Master Credit Facility”) between the Company and all of
      its subsidiaries other than Tribeca and the Tribeca Master Credit and Security
      Agreement, dated as of February 28, 2006, among Tribeca, Sky Bank and certain
      subsidiaries of Tribeca (the “Tribeca Master Credit Facility”).




Pursuant
      to the June Modification Letter, Franklin and Tribeca will no longer be required
      to pay Sky Bank a success fee upon the successful payoff of term loans made
      on
      or after June 26, 2006 under either of the master credit
      facilities.




F-20


In
      December 2006, the Company, Tribeca and Sky Bank entered into another amendment
      (the “Second Amendment”) to the Franklin Master Credit Facility and the Tribeca
      Master Credit Facility (together with the Franklin Master Credit Facility,
      the
“Master Credit Facilities”). Pursuant to the Second Amendment, Sky Bank agreed
      to the elimination of all success fee obligations under the Master Credit
      Facilities relating to term loans made before June 26, 2006, in consideration
      of
      the Company’s agreement to pay $4.5 million to Sky Bank. As a result of these
      amendments, neither the Company nor Tribeca will have any further success fee
      obligations upon payoff of term loans under any credit facilities. At December
      31, 2006, the success fee liability had been eliminated. At December 31, 2005,
      the success fee liability was $5.7 million.




***August
      2006 Modifications to Sky Bank Financing Arrangements***




In
      August
      2006, the Company received a letter from Sky Bank (the “August Modification
      Letter”) modifying both master credit facilities. Pursuant to the August
      Modification Letter, the interest rate charged by Sky Bank for all debt
      originated under the master credit facilities before July 1, 2005 was lowered
      initially by 25 basis points effective October 1, 2006. This rate was lowered
      by
      an additional 25 basis points effective January 1, 2007.




***December
      2006 Modifications to Sky Bank Financing Arrangements***




In
      December 2006, the Company received a letter from Sky Bank (the “December
      Interest Modification Letter”) modifying both master credit facilities. Pursuant
      to the December Interest Modification Letter, the interest rate payable to
      Sky
      Bank for term loans funded under the master credit facilities after November
      14,
      2006 in respect of loans originated by Tribeca and purchases of second mortgages
      by the Company is the Federal Home Loan Bank of Cincinnati 30-day advance rate
      as published daily by Bloomberg under the symbol FHL5LBRI, plus the applicable
      margin as follows:




If
                the 30-day advance rate is
            
            the
                applicable margin isLess
                than 2.26%
            
            300
                basis points2.26
                to 4.50%
            
            260
                basis pointsGreater
                than 4.50%
            
            235
                basis points





Additionally,
      pursuant to the December Interest Modification Letter, the interest rate payable
      to Sky Bank for term loans funded under the Franklin Master Credit Facility
      after November 14, 2006 in respect of purchases of first mortgages by the
      Company is the 30-day advance rate, plus the applicable margin as
      follows:




If
                the 30-day advance rate is
            
            the
                applicable margin isLess
                than 2.26%
            
            300
                basis points2.26
                to 4.50%
            
            225
                basis pointsGreater
                than 4.50%
            
            200
                basis points





F-21


As
      a
      result of these modifications, effective January 1, 2007, the interest rate
      on
      term borrowings under our master credit facilities is based on a floating rate
      equal to the 30-day advance rate, plus the applicable margin as
      follows:




**For
                Loans Funded****Prior
                to November 15, 2006**
            
            **On
                or After November 15, 2006****Purchase
                of First Mortgages**
            
            **Tribeca
                Originated Loans/**
              **Second
                Mortgage Purchases**If
                the 30-day advance rate is
            
            the
                applicable margin is
            
            the
                applicable margin is
            
            the
                applicable margin isLess
                than 2.26%
            
            300
                basis points
            
            300
                basis points
            
            300
                basis points2.26
                to 4.50%
            
            275
                basis points
            
            225
                basis points
            
            260
                basis pointsGreater
                than 4.50%
            
            250
                basis points
            
            200
                basis points
            
            235
                basis points





***Bank
      of Scotland Master Credit Facility***




In
      March
      2006, Tribeca and one of Tribeca’s subsidiaries (the “Tribeca Subsidiary
      Borrower”) entered into a $100 million master credit and security agreement (the
“BOS Loan”) with BOS (USA) Inc., an affiliate of Bank of Scotland. $98.2 million
      of proceeds of the BOS Loan were used to consolidate and refinance prior term
      loans made to certain Tribeca subsidiaries. Interest on the BOS Loan is
      payable monthly at a floating rate equal to the 30-day advance rate plus an
      applicable margin as follows:




If
                the 30-day advance rate is
            
            the
                applicable margin isLess
                than 2.26%
            
            300
                basis points2.26
                to 4.50%
            
            275
                basis pointsGreater
                than 4.50%
            
            250
                basis points





The
      unpaid principal balance of the BOS Loan will be amortized over a period of
      20
      years, but matures in March 2009. The Tribeca Subsidiary Borrower is required
      to
      make monthly amortization payments and payments of interest on the BOS
      Loan.




The
      facility contains affirmative, negative and financial covenants and events
      of
      default customary for facilities of this type. At December 31, 2006, Tribeca
      was
      in compliance with the covenants of the BOS Loan.




Tribeca’s
      and the Tribeca Subsidiary Borrower’s obligations under the facility are secured
      by (i) a first priority lien on loans acquired by the Tribeca Subsidiary
      Borrower that are refinanced by the proceeds of the BOS Loan and (ii) a second
      priority lien on collateral securing loans made to Tribeca or its
      subsidiaries under the Tribeca Master Credit Facility described above. In
      addition, pursuant to a lockbox arrangement, BOS is entitled to receive
      substantially all sums payable to Tribeca and the Tribeca Subsidiary Borrower
      in
      respect of any of the primary collateral under the facility. Tribeca’s BOS Loan
      and the Tribeca Master Credit Facility are cross-collateralized.




As
      of
      December 31, 2006 and 2005, the Company had Notes Payable, which includes
      amounts due under all master credit facilities, with an aggregate principal
      balance of $1,520,733,063 and $1,206,883,761, respectively. All Notes Payable
      are secured by an interest in the notes receivable, payments to be received
      under the notes receivable and the underlying collateral securing the notes
      receivable. At December 31, 2006, approximately $5,509,610 of the Notes Payable
      accrues interest at a rate of prime plus a margin of 0.50% to 1.75%,
      $162,749,209 accrues interest at the FHLB 30-day LIBOR advance rate plus 2.30%,
      $137,802,613 accrues interest at the FHLB 30-day LIBOR advance rate plus 2.35%,
      $764,097,793 accrues interest at the FHLB 30-day LIBOR advance rate plus 2.50%,
      $449,338,968 accrues interest at the FHLB 30-day LIBOR advance rate plus 2.75%,
      $368,946 accrues interest at the FHLB 30-day LIBOR advance rate plus 3.375%
      and
      $865,924 accrues interest at the FHLB 30-day LIBOR advance rate plus
      3.875%.




F-22


At
      December 31, 2006 and 2005, the weighted average interest rate on the Notes
      Payable was 7.99% and 7.28%, respectively. The above loans also require
      additional monthly principal reductions based on cash collections received
      by
      the Company.




Aggregate
      contractual maturities of all notes payable at December 31, 2006 are as
      follows:




2007
            
            $
            285,109,6452008
            
            
            357,698,4792009
            
            
            834,858,1872010
            
            
            41,941,3702011
            
            
            33,688Thereafter
            
            
            1,091,694$
            1,520,733,063





**6.** **FINANCING
        AGREEMENTS**




The
      Company and Tribeca have the following financing agreements:




***Warehousing
      Credit and Security Agreement***




Our
      Tribeca subsidiary entered into a Warehousing Credit and Security Agreement
      with
      Sky Bank on October 18, 2005, which replaced the facility as amended on April
      7,
      2004. The agreement provides for a commitment of $60 million that expires on
      April 30, 2007. This warehouse financing agreement provides Tribeca with the
      ability to borrow at a floating rate equal to Sky Bank’s prime rate less 50
      basis points, or a floor of 5% if the floating rate is lower than 5%. This
      credit facility is to be utilized for the purpose of originating mortgage loans.
      As of December 31, 2006 and 2005, $37.5 million and $56.3 million, respectively,
      were outstanding under the warehouse financing agreement. The prime rate at
      December 31, 2006 and December 31, 2005 was 8.25% and 7.25%,
      respectively.




The
      warehouse facility is secured by a lien on all of the mortgage loans delivered
      to our lender or in respect of which an advance has been made as well as by
      all
      mortgage insurance and commitments issued by insurers to insure or guarantee
      pledged mortgage loans. Tribeca also assigns all of its rights under third-party
      purchase commitments covering pledged mortgages and the proceeds of such
      commitments and its rights with respect to investors in the pledged mortgages
      to
      the extent such rights are related to pledged mortgages. In addition, Franklin
      has provided a guaranty of Tribeca’s obligations under the warehouse facility,
      which is secured by a lien on substantially all of our personal
      property.




***Flow
      Warehousing Credit and Security Agreement***




In
      August
      2006, Franklin entered into a new $40 million Flow Warehousing Credit and
      Security Agreement with our lenders to accumulate loans acquired by the
      Company’s Flow Acquisitions Group prior to consolidating such loans into term
      loans. This agreement expires on August 11, 2007.




F-23


Interest
      on advances is payable monthly at a rate per annum equal to a floating rate
      equal to the Wall Street Journal Prime Rate minus 50 basis points. The prime
      rate was 8.25% at December 31, 2006.




This
      warehouse facility is secured by a lien on all of the mortgage loans delivered
      to our lender or in respect of which an advance has been made as well as by
      all
      mortgage insurance and commitments issued by insurers to insure or guarantee
      pledged mortgage loans. The Company also assigns all of its rights under
      third-party purchase commitments covering pledged mortgages and the proceeds
      of
      such commitments and its rights with respect to investors in the pledged
      mortgages to the extent such rights are related to pledged mortgages. In
      addition, we have provided a guaranty of the Company’s obligations under this
      warehouse facility, which is secured by substantially all our personal property.
      As of December 31, 2006, we had approximately $22.9 million available under
      this
      facility.




***Other
      Credit Facilities***




The
      Company and Sky Bank have entered into a credit facility, which provides the
      Company with the ability to borrow a maximum of $4 million at a rate equal
      to
      the Bank’s prime rate less 50 basis points per annum. The credit facility may be
      utilized to pay real estate taxes or to purchase the underlying collateral
      of
      certain nonperforming real estate secured loans. Principal repayment of each
      respective advance is due six months from the date of such advance and interest
      is payable monthly. Prior to March 2005, this credit facility provided a maximum
      loan amount of $2.5 million at a rate equal to the Bank’s prime rate plus 200
      basis points per annum. Effective in October 2006, the rate was changed to
      the
      Bank’s prime rate less 50 basis points per annum. As of December 31, 2006 and
      2005, $1,289,155 and $948,104, respectively, were outstanding on this credit
      facility. The credit facility is secured by a first priority security interest
      in the respective notes receivable, any purchased real estate, payments received
      under the notes receivable, and collateral securing the notes of certain loan
      portfolios.




The
      Company has entered into a line of credit with another bank, which provides
      the
      Company with an unsecured line of credit to borrow a maximum of $150,000 at
      a
      rate equal to such bank’s prime rate plus 1% per annum. As of December 31, 2006,
      and 2005, $36,726 and $74,736, respectively, were outstanding on this line
      of
      credit. The prime rate at December 31, 2006 and December 31, 2005 was 8.25%
      and
      7.25%, respectively.




**7.** **INCOME
        TAXES**




The
      components of the income tax provision for the years ended December 31, 2006,
      2005 and 2004 are as follows:




**2006**
            
            **2005**
            
            **2004**Current
                provision:Federal
            
            $
            (4,302,164
            )
            $
            4,473,969
            
            $
            4,402,022State
                and local
            
            
            105,650
            
            
            1,266,541
            
            
            1,227,285(4,196,514
            )
            
            5,740,510
            
            
            5,629,307Deferred
                provision:Federal
            
            
            2,644,845
            
            
            633,188
            
            
            999,812State
                and local
            
            
            223,168
            
            
            199,003
            
            
            314,2262,868,013
            
            
            832,191
            
            
            1,314,038(Benefit)/provision
            
            $
            (1,328,501
            )
            $
            6,572,701
            
            $
            6,943,345





F-24


A
      reconciliation of the anticipated income tax expense (computed by applying
      the
      Federal statutory income tax rate to income before income tax expense) to the
      provision for income taxes in the accompanying consolidated statements of income
      for the years ended December 31, 2006, 2005 and 2004 is as follows:




**2006**
            
            **2005**
            
            **2004**Tax
                determined by applyingU.S.
                statutory rate to income
            
            $
            (1,050,443
            )
            $
            5,054,517
            
            $
            5,358,484Increase
                in taxes resulting from:State
                and local taxes,net
                of Federal benefit
            
            
            (338,026
            )
            
            1,465,544
            
            
            1,541,511Meals
                and entertainment
            
            
            59,968
            
            
            52,640
            
            
            43,350$
            (1,328,501
            )
            $
            6,572,701
            
            $
            6,943,345





The
      tax
      effects of temporary differences that give rise to significant components of
      deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005
      are presented below:




**2006**
            
            **2005**
            
            **2004**Deferred
                tax liabilities:Purchase
                discount
            
            $
            2,714,886
            
            $
            2,635,956
            
            $
            1,690,175Deferred
                costs
            
            
            2,948,508
            
            
            2,879,582
            
            
            1,433,690Restricted
                stock
            
            
            338,615
            
            
            118,280
            
            
            495,000Debt
                discount
            
            
            217,922
            
            
            -
            
            
            -Deferred
                tax liabilities
            
            $
            6,219,931
            
            $
            5,633,818
            
            
            3,618,865Deferred
                tax assets:Other
                real estate owned
            
            $
            552,622
            
            $
            427,664
            
            $
            583,644Accrued
                expenses
            
            
            220,500
            
            
            516,775
            
            
            -Acquisition
                costs
            
            
            1,179,281
            
            
            2,774,275
            
            
            2,257,681State
                net operating loss carryforwards
            
            
            612,045
            
            
            -
            
            
            -Success
                fee liability
            
            
            -
            
            
            1,127,634
            
            
            822,260Deferred
                tax assets
            
            $
            2,564,448
            
            $
            4,846,348
            
            $
            3,663,585Net
                deferred tax liability
            
            $
            3,655,483
            
            $
            787,470
            
            $
            (44,720
            )





The
      Company has not recorded a valuation allowance, as the Company has determined
      that it is more likely than not that all of the deferred tax assets will be
      realized.




As
      of
      December 31, 2006, the Company has tax net operating loss carryforwards with
      various states totalling approximately $8.7 million. The net operating loss
      carryforwards expire in various years beginning in 2013 through
      2026.




**8.** **STOCK-BASED
        COMPENSATION**




The
      Company awarded stock options to certain officers and directors under the
      Franklin Credit Management Corporation 1996 Stock Incentive Plan (the “Plan”) as
      amended. The Compensation Committee of the Board of Directors (the “Compensation
      Committee”) determines which eligible employees or directors will receive
      awards, the types of awards to be received, and the terms and conditions
      thereof.




F-25




Options
      granted under the Plan may be designated as either incentive stock options
      or
      non-qualified stock options. The Compensation Committee determines the terms
      and
      conditions of the option, including the time or times at which an option may
      be
      exercised, the methods by which such exercise price may be paid, and the form
      of
      such payment. Options are generally granted with an exercise price equal to
      the
      market value of the Company’s stock at the date of grant. These option awards
      generally vest over 1 to 3 years and have a contractual term of 10
      years.




The
      Company estimated the fair value of stock options granted on the date of grant
      using the Black-Scholes option-pricing model. The table below presents the
      assumptions used to estimate the fair value of stock options granted on the
      date
      of grant using the Black-Scholes option-pricing model for the years ended
      December 31, 2006, 2005 and 2004. The risk-free rate for periods within the
      contractual life of the stock option is based on the U.S. Treasury yield curve
      in effect at the time of grant. The Company uses historical data to estimate
      stock option exercise. The expected term of stock options granted is derived
      from the output of the model and represents the period of time that stock
      options granted are expected to be outstanding. The estimates of fair value
      from
      these models are theoretical values for stock options and changes in the
      assumptions used in the models could result in materially different fair value
      estimates. The actual value of the stock options will depend on the market
      value
      of the Company’s common stock when the stock options are exercised.




**2006**
            
            **2005**
            
            **2004**Risk-free
                interest rate
            
            
            4
            %
            
            4
            %
            
            5
            %Weighted
                average volatility
            
            
            48
            %
            
            109
            %
            
            83
            %Expected
                term (years)
            
            
            6
            
            
            6
            
            
            5





Transactions
      in stock options for the years ended December 31, 2006, 2005 and 2004 under
      the
      plan are summarized as follows:




**2006**
            
            **2005**
            
            **2004****Shares**
            
            **Weighted
                Average Price**
            
            **Shares**
            
            **Weighted
                Average Price**
            
            **Shares**
            
            **Weighted
                Average Price**Outstanding
                options, beginning
            
            
            667,500
            
            $
            2.88
            
            
            811,000
            
            $
            1.04
            
            
            1,017,500
            
            $
            0.95Options
                granted
            
            
            15,000
            
            $
            7.73
            
            
            106,500
            
            $
            13.57
            
            
            41,500
            
            $
            0.75Options
                cancelled
            
            
            (42,500
            )
            $
            12.32
            
            
            (29,000
            )
            $
            5.34
            
            
            (223,000
            )
            $
            0.75Options
                exercised
            
            
            (285,000
            )
            $
            1.11
            
            
            (221,000
            )
            $
            1.02
            
            
            (25,000
            )
            $
            0.75Outstanding
                options, end
            
            
            355,000
            
            $
            3.38
            
            
            667,500
            
            $
            2.88
            
            
            811,000
            
            $
            1.04





The
      weighted average remaining contractual term and aggregate intrinsic value of
      options outstanding was 5.41 years and $1,041,560, as of December 31, 2006.
      The
      weighted average remaining contractual term and aggregate intrinsic value of
      options exercisable was 5.25 years and $1,041,560, as of December 31,
      2006.




F-26




During
      2006, 2005 and 2004, there were 15,000, 106,500 and 41,500 options granted,
      respectively. The weighted average fair value per share of options granted
      during 2006, 2005 and 2004 was $3.89, $11.44 and $5.10,
      respectively.




The
      Company has the following options outstanding at December 31, 2006:




**Range
                of exercise price of options:**
            
            **Number**
              **Outstanding**
            
            **Number**
              **Exercisable**$0.75
            
            
            234,000
            
            
            234,000$0.85
            
            
            10,000
            
            
            10,000$1.04
            
            
            6,000
            
            
            6,000$2.25
            
            
            15,000
            
            
            15,000$3.55
            
            
            15,000
            
            
            15,000$7.73
            
            
            15,000
            
            
            15,000$12.85
            
            
            21,000
            
            
            21,000$13.75
            
            
            39,000
            
            
            19,500TOTAL
                OPTIONS
            
            
            355,000
            
            
            335,500Weighted
                average exercise price
            
            $
            3.38
            
            $
            2.78





As
      of
      December 31, 2006, there was $56,696 of unrecognized compensation cost related
      to the Company’s stock option awards. The weighted average period over which
      this cost is expected to be recognized is less than one year.




During
      2006, there were 87,000 warrants exercised at a price of $1.56. At December
      31,
      2006, the Company had 10,000 warrants outstanding at an exercise price of
      $5.00.




**2006
      Stock Incentive Plan**




On
      May
      24, 2006, the shareholders approved the 2006 Stock Incentive Plan. This approval
      authorized and reserved 750,000 shares for grant under the 2006 stock incentive
      plan. Awards can consist of non-qualified stock options, incentive stock
      options, stock appreciation rights, shares of restricted stock, restricted
      stock
      units, shares of unrestricted stock, performance shares and dividend equivalent
      rights are authorized. Grants of non-qualified stock options, incentive stock
      options and stock appreciation rights under the 2006 Stock Incentive Plan
      generally qualify as “performance-based compensation” under Section 162(m) of
      the Internal Revenue Code, and, therefore, are not subject to the provisions
      of
      Section 162(m), which disallow a federal income tax deduction for certain
      compensation in excess of $1 million per year paid to the Company’s Chief
      Executive Officer and each of its four other most highly compensated executive
      officers.




·  ***Restricted
      Stock*** -
      Restricted shares of the Company’s common stock have been awarded to certain
      executives. The stock awards are subject to restrictions on transferability
      and
      other restrictions, and step vest over a three year period.


F-27


A
      summary
      of the status of the Company’s restricted stock awards as of December 31, 2006,
      2005 and 2004 and changes during the period then ended is presented
      below:




**2006**
            
            **2005**
            
            **2004****Restricted
                Stock**
            
            **Shares**
            
            **Weighted
                Average Fair Value**
            
            **Shares**
            
            **Weighted
                Average Fair Value**
            
            **Shares**
            
            **Weighted
                Average Fair Value**Outstanding
                unvested grants, beginning
            
            
            27,000
            
            $
            12.92
            
            
            90,000
            
            $
            11.00
            
            
            -
            
            $
            -Granted
            
            
            122,000
            
            $
            7.82
            
            
            31,000
            
            $
            12.92
            
            
            100,000
            
            $
            11.00Vested
            
            
            (46,000
            )
            $
            8.79
            
            
            (54,000
            )
            $
            11.14
            
            
            (10,000
            )
            $
            11.00Canceled
            
            
            (8,000
            )
            $
            13.00
            
            
            (40,000
            )
            $
            11.00
            
            
            -
            
            $
            -Outstanding
                unvested grants, end
            
            
            95,000
            
            $
            8.36
            
            
            27,000
            
            $
            12.92
            
            
            90,000
            
            $
            11.00





During
      2006, the total fair value of the Company’s restricted stock that vested during
      2006 was $456,050.




As
      of
      December 31, 2006, there was $742,600 of unrecognized compensation cost related
      to the Company’s restricted stock awards, which will be recognized over a
      weighted average period of 3 years.




F-28




**9.** **SEGMENTS**




The
      Company has two reportable operating segments: (i) portfolio asset acquisition
      and resolution; and (ii) mortgage banking. The portfolio asset acquisition
      and
      resolution segment acquires performing, nonperforming, nonconforming and
      sub-performing notes receivable and promissory notes from financial
      institutions, mortgage and finance companies, and services and collects such
      notes receivable through enforcement of original note terms, modification of
      original note terms and, if necessary, liquidation of the underlying collateral.
      The mortgage-banking segment originates or purchases for sale and investment
      purposes residential mortgage loans to individuals whose credit histories,
      income and other factors cause them to be classified as subprime
      borrowers.




The
      Company’s management evaluates the performance of each segment based on profit
      or loss from operations before unusual and extraordinary items and income
      taxes.




**PORTFOLIO
                ASSET ACQUISITION**
              **AND
                RESOLUTION**
            
            **2006**
            
            **2005**
            
            **2004****REVENUES:**Interest
                income
            
            $
            100,637,297
            
            $
            74,715,325
            
            $
            52,889,964Purchase
                discount earned
            
            
            8,687,694
            
            
            10,754,979
            
            
            8,637,055Gain
                on sale of notes receivable
            
            
            163,911
            
            
            1,310,887
            
            
            1,701,113Gain
                on sale of other real estate owned
            
            
            1,744,833
            
            
            1,724,170
            
            
            448,805Other
            
            
            5,644,614
            
            
            5,528,263
            
            
            4,555,299Total
                revenues
            
            
            116,878,349
            
            
            94,033,624
            
            
            68,232,236**OPERATING
                EXPENSES:**Interest
                expense
            
            
            79,112,779
            
            
            51,602,872
            
            
            29,901,749Collection,
                general and administrative
            
            
            32,568,097
            
            
            25,824,139
            
            
            20,111,439Provision
                for loan losses
            
            
            9,545,885
            
            
            3,740,738
            
            
            3,369,803Amortization
                of deferred financing costs
            
            
            2,598,704
            
            
            2,982,031
            
            
            2,426,825Depreciation
            
            
            872,940
            
            
            856,234
            
            
            380,548Total
                operating expenses
            
            
            124,698,405
            
            
            85,006,014
            
            
            56,190,364(LOSS)/INCOME
                BEFORE PROVISIONFOR
                INCOME TAXES
            
            $
            (7,820,056
            )
            $
            9,027,610
            
            $
            12,041,872







F-29




**MORTGAGE
                BANKING**
            
            **2006**
            
            **2005**
            
            **2004****REVENUES:**Interest
                income
            
            $
            41,219,970
            
            $
            24,331,218
            
            $
            6,591,458Purchase
                discount earned
            
            
            237,144
            
            
            459,742
            
            
            597,841Gain
                on sale of originated loans
            
            
            1,871,633
            
            
            1,276,566
            
            
            1,444,037Gain
                on sale of other real estate owned
            
            
            173,989
            
            
            34,181
            
            
            93,397Other
            
            
            3,372,000
            
            
            1,263,883
            
            
            232,089Total
                revenues
            
            
            46,874,736
            
            
            27,365,590
            
            
            8,958,822**OPERATING
                EXPENSES:**Interest
                expense
            
            
            33,960,553
            
            
            16,727,093
            
            
            3,265,066Collection,
                general and administrative
            
            
            5,718,053
            
            
            2,875,994
            
            
            1,641,152Provision
                for loan losses
            
            
            204,508
            
            
            1,004,388
            
            
            335,530Amortization
                of deferred financing costs
            
            
            1,970,040
            
            
            1,123,187
            
            
            334,651Depreciation
            
            
            291,065
            
            
            221,062
            
            
            114,342Total
                operating expenses
            
            
            42,144,219
            
            
            21,951,724
            
            
            5,690,741INCOME
                BEFORE PROVISION FOR INCOME TAXES
            
            $
            4,730,517
            
            $
            5,413,866
            
            $
            3,268,081**OTHER
                SELECTED SEGMENT RESULTS****CONSOLIDATED
                ASSETS:**Portfolio
                asset acquisition and resolution
            
            $
            1,207,914,463
            
            $
            927,465,879
            
            $
            746,358,189Mortgage
                banking
            
            
            460,443,536
            
            
            405,326,813
            
            
            137,234,053Consolidated
                assets
            
            $
            1,668,357,999
            
            $
            1,332,792,692
            
            $
            883,592,242**TOTAL
                ADDITIONS TO BUILDING, FURNITURE AND FIXTURES:**Portfolio
                asset acquisition and resolution
            
            $
            539,180
            
            $
            3,291,282
            
            $
            372,011Mortgage
                banking
            
            
            311,252
            
            
            525,053
            
            
            155,574Consolidated
                additions to building, furniture and fixtures
            
            $
            850,432
            
            $
            3,816,335
            
            $
            527,585**CONSOLIDATED
                REVENUE:**Portfolio
                asset acquisition and resolution
            
            $
            116,878,349
            
            $
            94,033,624
            
            $
            68,232,236Mortgage
                banking
            
            
            46,874,736
            
            
            27,365,590
            
            
            8,958,822Consolidated
                revenue
            
            $
            163,753,085
            
            $
            121,399,214
            
            $
            77,191,058**CONSOLIDATED
                NET (LOSS)/INCOME:**Portfolio
                asset acquisition and resolution
            
            $
            (4,457,433
            )
            $
            4,889,417
            
            $
            6,601,844Mortgage
                banking
            
            
            2,696,395
            
            
            2,979,358
            
            
            1,764,764Consolidated
                net (loss)/income
            
            $
            (1,761,038
            )
            $
            7,868,775
            
            $
            8,366,608





F-30




**10.** **CERTAIN
        CONCENTRATIONS**




The
      following table summarizes percentages of total principal balances by the
      geographic location of properties securing the loans in our portfolio consisting
      of notes receivable, loans held for investment and loans held for sale at
      December 31, 2006 and December 31, 2005:




**December
                31,****Location**
            
            **2006**
            
            **2005**California
            
            
            12.61
            %
            
            5.97
            %New
                York
            
            
            11.01
            %
            
            11.07
            %New
                Jersey
            
            
            9.43
            %
            
            9.98
            %Florida
            
            
            6.92
            %
            
            6.37
            %Texas
            
            
            4.82
            %
            
            4.24
            %Pennsylvania
            
            
            4.54
            %
            
            4.83
            %Ohio
            
            
            4.31
            %
            
            5.84
            %Illinois
            
            
            3.71
            %
            
            2.63
            %Michigan
            
            
            3.15
            %
            
            2.87
            %Maryland
            
            
            3.00
            %
            
            2.00
            %All
                Others
            
            
            36.50
            %
            
            44.20
            %100.00
            %
            
            100.00
            %





Such
      real
      estate mortgage loans held are collateralized by real estate with a
      concentration in these states. Accordingly, the collateral value of a
      substantial portion of the Company’s real estate mortgage loans held and real
      estate acquired through foreclosure is susceptible to changes in market
      conditions in these states. In the event of sustained adverse economic or
      housing price conditions, it is possible that the Company could experience
      a
      negative impact in its ability to collect on existing real estate mortgage
      loans
      held, or liquidate foreclosed assets in these states, which could impact the
      Company’s related loan loss estimates.




***Financing*** -
      Substantially all of the Company’s existing debt and available credit facilities
      are with one financial institution. The Company’s purchases of new portfolios
      and financing of its mortgage banking operations are contingent upon the
      continued availability of these credit facilities.




**11.** **COMMITMENTS
      AND CONTINGENCIES**




***Operating
      Leases*** - During
      2005, the Company entered into two operating lease agreements for corporate
      office space, which contain provisions for future rent increases, rent-free
      periods, or periods in which rent payments are reduced (abated). The total
      amount of rental payments due over the lease term is being charged to rent
      expense on the straight-line method over the term of the lease. The difference
      between rent expense recorded and the amount paid is credited or charged to
      “Accrued expenses,” which is included in “Accounts payable and accrued expenses”
on the balance sheets. Rent expenses for 2006, 2005 and 2004 were $1,029,781,
      $1,696,089 (inclusive of $718,041 of lease termination costs) and $564,082,
      respectively.




F-31


The
      combined future minimum lease payments as of December 31, 2006 are as
      follows:




**Year
                Ended**
            
            **Amount**2007
            
            $
            1,350,2292008
            
            
            1,311,3952009
            
            
            1,339,7162010
            
            
            1,243,1742011
            
            
            1,377,692Thereafter
            
            
            2,755,420$
            9,377,626





Substantially
      all of the Company’s office equipment is leased under multiple operating leases.
      The combined future minimum lease payments as of December 31, 2006 are as
      follows:




**Year
                Ended**
            
            **Amount**2007
            
            $
            161,7162008
            
            
            149,8512009
            
            
            82,9722010
            
            
            11,134$
            405,673





***Capital
      Leases*** - The
      Company entered into a lease for office furniture for its new corporate office
      in Jersey City under an agreement that is classified as a capital lease. The
      cost of the furniture under this capital lease is included on the balance sheets
      as “Building, furniture and equipment” and was $916,890 at December 31, 2006.
      Accumulated amortization of the leased furniture at December 31, 2006 was
      $259,786. Amortization of assets under capital leases is included in
      depreciation expense.




The
      combined future minimum lease payments required under the capital lease as
      of
      December 31, 2006 are as follows:




**Year
                Ended**
            
            **Amount**2007
            
            $
            220,6352008
            
            
            220,6352009
            
            
            220,6352010
            
            
            128,671790,576Less
                amounts representing interest
            
            
            (111,728
            )$
            678,848





***Legal
      Actions*** - The
      Company is involved in legal proceedings and litigation arising in the ordinary
      course of business. In the opinion of management, the outcome of such
      proceedings and litigation currently pending will not materially affect the
      Company’s financial statements.




Certain
      whole-loan sale contracts include provisions requiring the Company to repurchase
      a loan if a borrower fails to make one or more of the first loan payments due
      on
      the loan after the date of sale. In addition, the purchaser may require that
      the
      Company refund a portion of the premium paid on the sale of mortgage loans
      if a
      loan is prepaid in full within a certain amount of time from the date of sale.
      The Company records a provision for estimated repurchases and premium recapture
      on loans sold, which is charged to gain on sale of loans.




At
      December 31, 2006, the Company had a remaining potential repurchase obligation
      of $25.6 million. The Company reserved $213,000 for the reversal of the
      estimated gain that relates to this repurchase obligation.


F-32




**12.** **RELATED
      PARTY TRANSACTIONS**




The
      Company subleased approximately 2,500 square feet of office space on the
      5 th floor at
      Six Harrison Street in New York, New York, from RMTS Associates, LLC, of which
      Thomas J. Axon, the Company’s Chairman and President, owns 80%. Pursuant to the
      lease, the Company paid RMTS rent of approximately $48,200 in 2005 and $51,500
      in 2004. This lease was terminated on August 31, 2005.




On
      May
      12, 2005, the Company entered into a Termination Agreement (the “Six Harrison
      Termination Agreement”) by and among RMTS, LLC, a New York limited liability
      company of which Mr. Axon owns 80% (the “Sublessor”), James Thomas Realty, a New
      York limited liability corporation (the “Landlord”) of which Mr. Axon owns 90%
      and Frank B. Evans, Jr., a member of the Company’s Board of Directors, owns 10%,
      and the Company. Under the Six Harrison Termination Agreement, the Landlord
      and
      the Sublessor agreed, in connection with the Company’s planned relocation of
      operations to Jersey City, New Jersey, to the early termination of the Company’s
      sublease for approximately 2,500 square feet of office space at Six Harrison
      Street in New York, New York, which was due to expire in August 2009, in
      consideration of the Company’s payment of $125,000 to the Landlord.




The
      Company leased approximately a total of 7,400 square feet of office space at
      185
      Franklin Street in New York, New York from 185 Franklin Street Development
      Associates, a limited partnership, of which 185 Franklin Street Development
      Corp., which is wholly-owned by Mr. Axon, is the general partner. Pursuant
      to
      the sublease, the Company paid 185 Franklin Street Development Associates rent
      of $19,500 per month in 2005 and 2004. These leases were also terminated on
      August 31, 2005.




On
      May
      12, 2005, the Company entered into a Termination Agreement (the “185 Franklin
      Termination Agreement”) with 185 Franklin Street Development Associates L.P., a
      New York limited partnership (the “185 Franklin Lessor”), the general partner of
      which is owned by an entity that is owned by Mr. Axon. Pursuant to the
      termination agreement, the 185 Franklin Lessor agreed, in connection with the
      Company’s planned relocation of operations to Jersey City, New Jersey, to the
      early termination of the Company’s leases for approximately 7,400 square feet of
      office space at 185 Franklin Street in New York, New York, which were due to
      expire on dates ranging from February 2008 through October 2008, in
      consideration of the Company’s payment of $462,859 to the 185 Franklin
      Lessor.




At
      December 31, 2006 and 2005, respectively, the Company had an outstanding
      receivable from an affiliate, RMTS Associates of $234,069 and $245,915. This
      receivable represents various operating expenses that are paid by the Company
      and then reimbursed by RMTS.




On
      February 13, 2006, Tribeca entered into a lease agreement with 18 Harrison
      Development Associates, an entity controlled by Thomas J. Axon, to lease
      approximately 950 square feet on the 5 th floor at
      18 Harrison Street, New York, New York for use as additional office space.
      The
      term of the lease is through February 12, 2007, at approximately $4,880 per
      month, and the option to extend the lease for an additional period of one year
      at a rate of approximately $5,124 per month was exercised.




F-33




During
      2006, the Company entered into a month-to-month agreement with its Chairman
      and
      President, Thomas J. Axon, for use of a condominium apartment unit at 300 Albany
      Street in New York, New York for corporate housing. The Company paid $27,000
      under this agreement in 2006.




**13.** **QUARTERLY
      FINANCIAL INFORMATION (Unaudited)**




***Consolidated
      Statements of Income***




**2006
                Quarters****Fourth**
            
            **Third**
            
            **Second**
            
            **First****Revenues:**Interest
                income
            
            $
            37,286,388
            
            $
            35,855,704
            
            $
            35,272,864
            
            $
            33,442,311Purchase
                discount earned
            
            
            2,061,454
            
            
            2,660,711
            
            
            2,223,710
            
            
            1,978,963Gain
                on sale of notes receivable
            
            
            -
            
            
            94,862
            
            
            -
            
            
            69,049Gain
                on sale of originated loans
            
            
            185,113
            
            
            1,349,724
            
            
            170,924
            
            
            165,872Gain
                on sale of other real estate owned
            
            
            606,483
            
            
            70,056
            
            
            440,741
            
            
            801,542Prepayment
                penalties and other income
            
            
            2,040,694
            
            
            2,435,600
            
            
            2,335,115
            
            
            2,205,205Total
                revenues
            
            
            42,180,132
            
            
            42,466,657
            
            
            40,443,354
            
            
            38,662,942**Operating
                Expenses:**Interest
                expense
            
            
            31,189,160
            
            
            29,494,108
            
            
            27,898,497
            
            
            24,491,567Collection,
                general and administrative
            
            
            9,484,646
            
            
            10,420,831
            
            
            10,432,793
            
            
            7,947,880Provision
                for loan losses
            
            
            3,009,952
            
            
            1,709,165
            
            
            3,162,146
            
            
            1,869,130Amortization
                of deferred financing costs
            
            
            979,524
            
            
            1,550,790
            
            
            1,130,415
            
            
            908,015Depreciation
            
            
            314,071
            
            
            286,616
            
            
            251,613
            
            
            311,705Total
                expenses
            
            
            44,977,353
            
            
            43,461,510
            
            
            42,875,464
            
            
            35,528,297(Loss)/income
                before provisionfor
                income taxes
            
            
            (2,797,221
            )
            
            (994,853
            )
            
            (2,432,110
            )
            
            3,134,645Income
                tax (benefit)/provision
            
            
            (1,202,802
            )
            
            (430,898
            )
            
            (1,042,698
            )
            
            1,347,897Net
                (loss)/income
            
            $
            (1,594,419
            )
            $
            (563,955
            )
            $
            (1,389,412
            )
            $
            1,786,748**Net
                (loss)/income per common share:**Basic
            
            $
            (0.20
            )
            $
            (0.07
            )
            $
            (0.18
            )
            $
            0.24Diluted
            
            $
            (0.20
            )
            $
            (0.07
            )
            $
            (0.18
            )
            $
            0.22


F-34







**2005
                Quarters****Fourth**
            
            **Third**
            
            **Second**
            
            **First****Revenues:**Interest
                income
            
            $
            27,627,833
            
            $
            24,563,184
            
            $
            23,978,328
            
            $
            22,877,198Purchase
                discount earned
            
            
            2,948,606
            
            
            3,146,839
            
            
            2,867,795
            
            
            2,251,481Gain
                on sale of notes receivable
            
            
            -
            
            
            644,985
            
            
            665,902
            
            
            -Gain
                on sale of originated loansheld
                for sale
            
            
            140,427
            
            
            229,906
            
            
            578,306
            
            
            327,927Gain
                on sale of other real estate owned
            
            
            566,660
            
            
            535,308
            
            
            400,402
            
            
            255,981Prepayment
                penalties and other income
            
            
            1,994,340
            
            
            1,753,121
            
            
            1,655,273
            
            
            1,389,412Total
                revenues
            
            
            33,277,866
            
            
            30,873,343
            
            
            30,146,006
            
            
            27,101,999**Operating
                Expenses:**Interest
                expense
            
            
            20,552,831
            
            
            18,283,805
            
            
            16,313,059
            
            
            13,180,270Collection,
                general and administrative
            
            
            7,237,316
            
            
            6,874,657
            
            
            7,909,409
            
            
            6,678,751Provision
                for loan losses
            
            
            1,414,039
            
            
            1,080,155
            
            
            1,052,714
            
            
            1,198,218Amortization
                of deferred financing costs
            
            
            1,166,408
            
            
            1,233,089
            
            
            1,012,734
            
            
            692,987Depreciation
            
            
            297,299
            
            
            365,170
            
            
            209,353
            
            
            205,474Total
                expenses
            
            
            30,667,893
            
            
            27,836,876
            
            
            26,497,269
            
            
            21,955,700Income
                before provision for income taxes
            
            
            2,609,973
            
            
            3,036,467
            
            
            3,648,737
            
            
            5,146,299Provision
                for income taxes
            
            
            1,141,583
            
            
            1,381,029
            
            
            1,678,919
            
            
            2,371,170Net
                income
            
            $
            1,468,390
            
            $
            1,655,438
            
            $
            1,969,818
            
            $
            2,775,129**Net
                income per common share:**Basic
            
            $
            0.20
            
            $
            0.23
            
            $
            0.33
            
            $
            0.46Diluted
            
            $
            0.18
            
            $
            0.22
            
            $
            0.29
            
            $
            0.42





F-35




**14.** **SUBSEQUENT
      EVENTS**




On
      February 14, 2007, Tribeca entered into a definitive agreement with The New
      York
      Mortgage Company, LLC (“NYMC”) to acquire its wholesale mortgage origination
      operation, which includes offers of employment to approximately 60 sales and
      processing personnel located in Bridgewater, New Jersey. The acquisition was
      effective on February 22, 2007.




Tribeca
      paid $485,000 for the associated fixed assets and intellectual property and
      assumed the lease obligation for the Bridgewater office facility. In addition,
      Tribeca took over the existing pipeline of “Alt-A” loans as of the closing of
      the transaction. Tribeca will pay NYMC 50 basis points for each loan in the
      acquired pipeline that is closed by Tribeca within 90 days of the effective
      date
      of the acquisition. Tribeca did not purchase any closed loans or other assets
      from NYMC, nor assume any liabilities other than the Bridgewater
      lease.




On
      January 21, 2007, the Company repurchased $17.2 million of Liberty loans
      previously sold to investors. The Company recorded a liability at December
      31,
      2006 for a reserve for the estimated losses of $444,000.




F-36